FIRSTCITY FINANCIAL CORP, 10-K405, 2000-04-06

FIRSTCITY FINANCIAL CORP
10-K405, 2000-04-06
STATE COMMERCIAL BANKS

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-26500

FIRSTCITY FINANCIAL CORPORATION
(Exact name of Registrant as Specified in Its Charter)

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DELAWARE 76-0243729
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

6400 IMPERIAL DRIVE, WACO, TX 76712
(Address of Principal Executive Offices) (Zip Code)
</TABLE>

(254) 751-1750
(Registrant's Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:
NONE

Securities Registered Pursuant to Section 12(g) of the Act:

TITLE OF EACH CLASS

Common Stock, par value $.01
Adjusting Rate Preferred Stock, par value $.01

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

The number of shares of common stock outstanding at February 8, 2000 was
8,333,300. As of such date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates, based upon the closing price of
the common stock on the NASDAQ National Market System, was approximately
$23,547,223.

DOCUMENTS INCORPORATED BY REFERENCE

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FORM 10-K
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Notice of Annual Meeting and Proxy Statement for the 2000
Annual Meeting of Shareholders............................ III
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FIRSTCITY FINANCIAL CORPORATION

TABLE OF CONTENTS

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PAGE
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 13
Item 3 Legal Proceedings........................................... 13
Item 4 Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 14
Item 6 Selected Financial Data..................................... 15
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 40
Item 8 Financial Statements and Supplementary Data................. 43
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure.................................................. 80
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 80
Item 11 Executive Compensation...................................... 80
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 80
Item 13 Certain Relationships and Related Transactions.............. 80
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 81
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FORWARD LOOKING INFORMATION

This Annual Report on Form 10-K may contain forward-looking statements. The
factors identified under "Risk Factors" are important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by,
or on behalf of, the Company.

When any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. When, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The words "believe," "expect," "estimate," "project," "anticipate" and similar
expressions identify forward-looking statements.

PART I

ITEM 1. BUSINESS.

GENERAL

The Company is a diversified financial services company headquartered in
Waco, Texas with offices throughout the United States and a presence in France
and Mexico. The Company began operating in 1986 as a specialty financial
services company focused on acquiring and resolving distressed loans and other
assets purchased at a discount relative to the aggregate unpaid principal
balance of the loans or the appraised value of the other assets ("Face Value").
To date the Company has acquired, for its own account and through various
affiliated partnerships, pools of assets or single assets (collectively referred
to as "Portfolio Assets" or "Portfolios") with a Face Value of approximately
$4.0 billion. In 1996, the Company adopted a growth strategy to diversify and
expand its financial services business. To implement its growth strategy, the
Company has acquired or established several businesses in the financial services
industry, building upon its core strength and expertise as one of the earliest
participants in the business of acquiring and resolving distressed financial
assets and other assets. The Company's servicing expertise, which it has
developed largely through the resolution of distressed assets, is a cornerstone
of its growth strategy. Today the Company is engaged in two principal
businesses: (i) Portfolio Asset acquisition and resolution; and (ii) consumer
lending.

BUSINESS STRATEGY

The Company's business strategy is to continue to broaden and expand its
business within the financial services industry while building on its core
servicing strengths and credit expertise. The following principles are key
elements to the execution of the Company's business strategy:

- Expand the financial products and services offered by existing
businesses.

- Broaden its sources of revenue and operating earnings by developing or
acquiring additional businesses that leverage its core strengths and
management expertise.

- Pursue new business opportunities through joint ventures, thereby
capitalizing on the expertise of partners whose skills complement those
of the Company.

- Maximize growth in earnings, thereby permitting the utilization of the
Company's net operating loss carryforwards ("NOLs").

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BACKGROUND

The Company began operating in the financial service business in 1986 as a
purchaser of distressed assets from the Federal Deposit Insurance Corporation
("FDIC") and the Resolution Trust Corporation ("RTC"). From its original office
in Waco, Texas, with a staff of four professionals, the Company's asset
acquisition and resolution business grew to become a significant participant in
an industry fueled by the problems experienced by banks and thrifts throughout
the United States. In the late 1980s, the Company also began acquiring assets
from healthy financial institutions interested in eliminating nonperforming
assets from their portfolios. The Company began its relationship with Cargill
Financial Services Corporation ("Cargill Financial") in 1991. Since that time,
the Company and Cargill Financial have formed a series of Acquisition
Partnerships through which they have jointly acquired over $3.2 billion in Face
Value of distressed assets. By the end of 1994, the Company had grown to nine
offices with over 180 professionals and had acquired portfolios with assets in
virtually every state.

In July 1995, the Company acquired by merger (the "Merger") First City
Bancorporation of Texas, Inc. ("FCBOT"), a former bank holding company that had
been engaged in a proceeding under Chapter 11 of the Bankruptcy Code since
November 1992. As a result of the Merger, the Common Stock of the Company became
publicly held and the Company received $20 million of additional equity capital
and entered into an incentive-based servicing agreement to manage approximately
$300 million in assets for the benefit of the former equity holders of FCBOT. In
addition, as a result of the Merger, the Company retained FCBOT's rights to
approximately $596 million in NOLs, which the Company believes it can use to
offset taxable income generated by the Company and its consolidated
subsidiaries.

Following the Merger, the Company adopted a growth and diversification
strategy designed to capitalize on its servicing and credit expertise to expand
into additional financial service businesses with management partners that have
distinguished themselves among competitors. To that end, in July 1997 the
Company acquired Harbor Financial Group, Inc. (formerly known as FirstCity
Mortgage Corp.), a company engaged in the residential and commercial mortgage
banking business since 1983. During 1997, the Company also expanded into related
niche financial services markets, such as consumer finance, conducted through
FirstCity Consumer Lending Corporation ("Consumer Corp."), a subsidiary formed
in 1997, and mortgage conduit banking, conducted through FC Capital Corp.
("Capital Corp."), a subsidiary formed in 1997.

Effective during the third quarter of 1999, management of the Company
adopted formal plans to discontinue the operations of Harbor Financial Group,
Inc. and its subsidiaries (collectively referred to as "Mortgage Corp.") and
Capital Corp. These entities comprise the operations that were previously
reported as the Company's mortgage banking operations. Because the Company
formally adopted plans to discontinue the operations of Mortgage Corp. and
Capital Corp., and operations at each such entity have either ceased, or are
expected to cease in the near future (no later than one year following the
adoption of the plan to discontinue operations), the results of the current and
historical operations have been reflected as discontinued operations.

On October 14, 1999, Mortgage Corp. filed for protection under Chapter 11
of the Bankruptcy Code. Mortgage Corp.'s filings with the bankruptcy court
reflected that it had stated assets of approximately $95 million and stated
liabilities of approximately $98 million. FirstCity has not guaranteed the
indebtedness of Mortgage Corp. and has previously reached agreement with its
corporate revolving lenders to permanently waive any events of default related
to Mortgage Corp., including bankruptcy. Neither FirstCity nor any of its other
affiliates or business units are contemplating filing bankruptcy.

PORTFOLIO ASSET ACQUISITION AND RESOLUTION

The Company engages in the Portfolio Asset acquisition and resolution
business through its wholly owned subsidiary, FirstCity Commercial Corporation,
and its subsidiaries ("Commercial Corp."). In the Portfolio Asset acquisition
and resolution business Commercial Corp. acquires and resolves portfolios of
performing and nonperforming commercial and consumer loans and other assets,
which are generally acquired at a discount to Face Value. Purchases may be in
the form of pools of assets or single assets. Performing assets are those as to
which debt service payments are being made in accordance with the original or
restructured terms of such assets. Nonperforming assets are those as to which
debt service payments are not being made in accordance
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with the original or restructured terms of such assets, or as to which no debt
service payments are being made. Portfolios are designated as nonperforming
unless substantially all of the assets comprising the Portfolio are performing.
Once a Portfolio has been designated as either performing or nonperforming, such
designation is not changed regardless of the performance of the assets
comprising the Portfolio. Portfolios are either acquired for Commercial Corp.'s
own account or through investment entities formed with Cargill Financial or one
or more other co-investors (each such entity, an "Acquisition Partnership"). See
"-- Portfolio Asset Acquisition and Resolution Business -- Relationship with
Cargill Financial." To date, Commercial Corp. and the Acquisition Partnerships
have acquired over $4.0 billion in Face Value of assets.

Portfolio Asset Acquisition and Resolution Business

SOURCES OF ASSETS ACQUIRED

In the early 1990s large quantities of nonperforming assets were available
for acquisition from the RTC and the FDIC. Since 1993, most sellers of
nonperforming assets have been private sellers, rather than government agencies.
These private sellers include financial institutions and other institutional
lenders, both in the United States and in various foreign countries, and, to a
lesser extent, insurance companies in the United States. As a result of mergers,
acquisitions and corporate downsizing efforts, other business entities
frequently seek to dispose of excess real estate property or other financial
assets not meeting the strategic needs of a seller. Sales of such assets improve
the seller's balance sheet, reduce overhead costs, reduce staffing requirements
and avoid management and personnel distractions associated with the intensive
and time-consuming task of resolving loans and disposing of real estate.
Consolidations within a broad range of industries, especially banking, have
augmented the trend of financial institutions and other sellers packaging and
selling asset portfolios to investors as a means of disposing of nonperforming
loans or other surplus or non-strategic assets.

PORTFOLIO ASSETS

Commercial Corp. acquires and manages Portfolio Assets, which are generally
purchased at a discount to Face Value by Commercial Corp. or through Acquisition
Partnerships. The Portfolio Assets are generally nonhomogeneous assets,
including loans of varying qualities that are secured by diverse collateral
types and foreclosed properties. Some Portfolio Assets are loans for which
resolution is tied primarily to the real estate securing the loan, while others
may be collateralized business loans, the resolution of which may be based
either on business real estate or other collateral cash flow. Consumer loans may
be secured (by real or personal property) or unsecured. Portfolio Assets may be
designated as performing or nonperforming. Commercial Corp. generally expects to
resolve Portfolio Assets within three to five years after purchase.

To date, a substantial majority of the Portfolio Assets acquired by
Commercial Corp. have been designated as nonperforming. Commercial Corp. seeks
to resolve nonperforming Portfolio Assets through (i) a negotiated settlement
with the borrower in which the borrower pays all or a discounted amount of the
loan, (ii) conversion of the loan into a performing asset through extensive
servicing efforts followed by either a sale of the loan to a third party or
retention of the loan by Commercial Corp. or the Acquisition Partnership or
(iii) foreclosure of the loan and sale of the collateral securing the loan.
Commercial Corp. generally retains Portfolio Assets that are designated as
performing for the life of the loans comprising the Portfolio.

Commercial Corp. has substantial experience acquiring, managing and
resolving a wide variety of asset types and classes. As a result, it does not
limit itself as to the types of Portfolios it will evaluate and purchase. The
main factors determining Commercial Corp.'s willingness to acquire Portfolio
Assets include the information that is available regarding the assets in a
portfolio, the price at which such portfolio can be acquired and the expected
net cash flows from the resolution of such assets. Commercial Corp. has acquired
Portfolio Assets in virtually all 50 states, the Virgin Islands, Puerto Rico,
France, Japan and Mexico. Commercial Corp. believes that its willingness to
acquire nonhomogeneous Portfolio Assets without regard to geographic location
provides it with an advantage over certain competitors that limit their
activities to either a specific asset type or geographic location. Although
Commercial Corp. imposes no constraints on geographic

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locations of Portfolio Assets, the majority of assets acquired to date have been
in the Northeastern and Southern areas of the United States.

Commercial Corp. also seeks to capitalize on emerging opportunities in
foreign markets where the market for nonperforming loans of the type generally
purchased by Commercial Corp. is less efficient than the market for such assets
in the United States. Through December 31, 1999, Commercial Corp. has acquired,
with Cargill Financial and a local French partner, eight Portfolios in France,
consisting of approximately 11,000 assets, for an aggregate purchase price of
approximately $205 million. Such assets had a Face Value of approximately $875
million. Commercial Corp.'s share of the equity interest in the Portfolios
acquired in France ranges from 10% to 33 1/3% and Commercial Corp. has made a
total equity investment therein of approximately $17 million. Commercial Corp.
has an established presence in Paris, France and is actively pursuing
opportunities to purchase additional pools of distressed assets in France and
other areas of Western Europe. In addition, Commercial Corp. has established
offices in Guadalajara and Mexico City, Mexico. Through December 31, 1999
Commercial Corp. has acquired, with various partners, two portfolios of
residential mortgages in Mexico consisting of approximately 3,700 assets for a
purchase price of approximately $12.4 million and a Face Value of approximately
$140.6 million. Commercial Corp.'s share of the equity interest in the two
Portfolios acquired in Mexico is 11.12% and 20% with a combined equity
investment by Commercial Corp. totaling $1.5 million. During 1999, Commercial
Corp. sold its interests in two groups of loans in Japan.

The following table presents, for each of the years in the three-year
period ended December 31, 1999, selected data for the Portfolio Assets acquired
by Commercial Corp.

PORTFOLIO ASSETS

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YEAR ENDED DECEMBER 31,
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1999 1998 1997
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(DOLLARS IN THOUSANDS)
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Face Value........................................... $516,518 $537,356 $504,891
Total purchase price................................. 210,799 139,691 183,229
Total equity invested................................ 63,260 65,073 54,764
Commercial Corp. equity invested..................... $ 11,203 $ 28,478 $ 37,109
Total number of Portfolio Assets..................... 5,769 4,966 5,503
</TABLE>

Sources of Portfolio Assets

Commercial Corp. develops its Portfolio Asset opportunities through a
variety of sources. The activities or contemplated activities of expected
sellers are publicized in industry publications and through other similar
sources. Commercial Corp. also maintains relationships with a variety of parties
involved as sellers or as brokers or agents for sellers. Many of the brokers and
agents concentrate by asset type and have become familiar with Commercial
Corp.'s acquisition criteria and periodically approach Commercial Corp. with
identified opportunities. In addition, repeat business referrals from Cargill
Financial or other co-investors in Acquisition Partnerships, repeat business
from previous sellers, focused marketing by Commercial Corp. and the nationwide
presence of Commercial Corp. and the Company are important sources of business.

Commercial Corp. has identified and seeks to continue to identify foreign
partners that have contacts within each foreign market and can bring Portfolio
Asset opportunities to Commercial Corp. Commercial Corp. expects that it will
only pursue acquisitions in foreign markets in conjunction with a local foreign
partner and markets where Cargill Financial has a presence.

Asset Analysis and Underwriting

Prior to making an offer to acquire any Portfolio, Commercial Corp.
performs an extensive evaluation of the assets that comprise the Portfolio. If,
as is often the case, the Portfolio Assets are nonhomogeneous, Commercial Corp.
will evaluate all individual assets determined to be significant to the total of
the proposed purchase. If the Portfolio Assets are homogenous in nature, a
sample of the assets comprising the Portfolio is

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selected for evaluation. The evaluation of an individual asset generally
includes analyzing the credit and collateral file or other due diligence
information supplied by the seller. Based upon such seller-provided information,
Commercial Corp. will undertake additional evaluations of the asset which, to
the extent permitted by the seller, will include site visits to and
environmental reviews of the property securing the loan or the asset proposed to
be purchased. Commercial Corp. will also analyze relevant local economic and
market conditions based on information obtained from its prior experience in the
market or from other sources, such as local appraisers, real estate principals,
realtors and brokers.

The evaluation further includes an analysis of an asset's projected cash
flow and sources of repayment, including the availability of third party
guarantees. Commercial Corp. values loans (and other assets included in a
portfolio) on the basis of its estimate of the present value of estimated cash
flow to be derived in the resolution process. Once the cash flow estimates for a
proposed purchase and the financing and partnership structure, if any, are
finalized, Commercial Corp. can complete the determination of its proposed
purchase price for the targeted Portfolio Assets. Purchases are subject to
purchase and sale agreements between the seller and the purchasing affiliate of
Commercial Corp.

Servicing

After a Portfolio is acquired, Commercial Corp. assigns it to an account
servicing officer who is independent of the officer that performed the due
diligence evaluation in connection with the purchase of the Portfolio. Portfolio
Assets are serviced either at the Company's headquarters or in one of Commercial
Corp.'s other offices. Commercial Corp. generally establishes servicing
operations in locations in close proximity to significant concentrations of
Portfolio Assets. Most of such offices are considered temporary and are reviewed
for closing after the assets in the geographic region surrounding the office are
substantially resolved. The assigned account servicing officer develops a
business plan and budget for each asset based upon an independent review of the
cash flow projections developed during the investment evaluation, a physical
inspection of each asset or the collateral underlying the related loan,
evaluation of local market conditions and discussions with the relevant
borrower. Budgets are periodically reviewed and revised as necessary. Commercial
Corp. employs loan tracking software and other operational systems that are
generally similar to systems used by commercial banks, but which have been
enhanced to track both the collected and the projected cash flows from Portfolio
Assets.

In prior years, Commercial Corp. completed three structured
securitization/financing transactions. To date, the net present value of
Commercial Corp.'s cash flows from serviced assets has exceeded initial
projections. The basis for such transactions differs from traditional
securitization structures in which the execution levels are predicated upon the
existence of an underlying contractual stream of cash flows from periodic
payments on underlying loans. Transactions completed by Commercial Corp. to date
have been based not only on the cash flow from performing assets but also the
projected cash flows from nonperforming assets such as unoccupied real estate
and raw land parcels. Commercial Corp. believes that its success in predicting
cash flows from Portfolio Assets has permitted it to access the securitization
markets on attractive terms.

Commercial Corp. services all of the Portfolio Assets owned for its own
account, all of the Portfolio Assets owned by the Acquisition Partnerships and,
to a very limited extent, Portfolio Assets owned by related third parties. In
connection with the Acquisition Partnerships, Commercial Corp. generally earns a
servicing fee of between 1% and 8% of gross cash collections generated rather
than a management fee based on the Face Value of the asset being serviced. The
rate of servicing fee charged is a function of the average Face Value of the
assets within each pool being serviced (the larger the average Face Value of the
assets in a Portfolio, the lower the fee percentage within the prescribed
range).

Structure and Financing of Portfolio Asset Purchases

Portfolio Assets are acquired for the account of a subsidiary of Commercial
Corp. and through the Acquisition Partnerships. Portfolio Assets owned directly
by a subsidiary of Commercial Corp. are financed with cash contributed by
Commercial Corp. and secured senior debt that is recourse only to such
subsidiary.

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Each Acquisition Partnership is a separate legal entity, generally formed
as a limited partnership. Commercial Corp. and an investor typically form a
corporation to serve as the corporate general partner of each Acquisition
Partnership. Generally, Commercial Corp. and the investor each own 50% of the
general partner and a 49% limited partnership interest in the Acquisition
Partnership (the general partner owns the other 2% interest). Cargill Financial
or its affiliates are the investor in the vast majority of the Acquisition
Partnerships currently in existence. See "-- Relationship with Cargill
Financial." Certain institutional investors have also held limited partnership
interests in the Acquisition Partnerships and may hold interests in the related
corporate general partners. Acquisition Partnerships may also be formed as a
limited liability company, trust, corporation or other type of entity.

The Acquisition Partnerships are generally financed by debt secured only by
the assets of the individual entity and are nonrecourse to the Company,
Commercial Corp., its co-investors and the other Acquisition Partnerships.
Commercial Corp. believes that such legal structure insulates it, the Company
and the other Acquisition Partnerships from certain potential risks, while
permitting Commercial Corp. to share in the economic benefits of each
Acquisition Partnership.

Senior secured acquisition financing currently provides the majority of the
funding for the purchase of Portfolios. Commercial Corp. and the Acquisition
Partnerships have relationships with a number of senior lenders including
Cargill Financial. Senior acquisition financing is obtained at variable interest
rates ranging from LIBOR to prime based pricing with negotiated spreads to the
base rates. The final maturity of the senior secured acquisition debt is
normally two years from the date of funding of each advance under the facility.
The terms of the senior acquisition debt of the Acquisition Partnerships
generally allow, under certain conditions, distributions to equity partners
before the debt is repaid in full.

Prior to maturity of the senior acquisition debt, the Acquisition
Partnerships typically refinance the senior acquisition debt with long-term debt
secured by the assets of partnerships or transfer assets from the Portfolios to
special purpose entities to effect structured financings or securitization
transactions. Such long-term debt generally accrues interest at a lower rate
than the senior acquisition debt, has collateral terms similar to the senior
acquisition debt, and permits distributions of excess cash flow generated by the
partnership to the equity partners so long as the partnership is in compliance
with applicable financial covenants.

Relationship with Cargill Financial

Cargill Financial, a diversified financial services company, is a wholly
owned subsidiary of Cargill, Incorporated, which is generally regarded as one of
the world's largest privately-held corporations and has offices worldwide.
Cargill Financial and its affiliates provide significant debt and equity
financing to the Acquisition Partnerships. In addition, Commercial Corp.
believes its relationship with Cargill Financial significantly enhances
Commercial Corp.'s credibility as a purchaser of Portfolio Assets and
facilitates its ability to expand into other businesses and foreign markets.

Under a Right of First Refusal Agreement and Due Diligence Reimbursement
Agreement effective as of January 1, 1998, as amended (the "Right of First
Refusal Agreement") among the Company, FirstCity Servicing Corporation, Cargill
Financial and its wholly owned subsidiary CFSC Capital Corp. II ("CFSC"), if the
Company receives an invitation to bid on or otherwise obtains an opportunity to
acquire interests in domestic loans, receivables, real estate or other assets in
which the aggregate amount to be bid exceeds $4 million, the Company is required
to follow a prescribed notice procedure pursuant to which CFSC has the option to
participate in the proposed purchase by requiring that such purchase or
acquisition be effected through an Acquisition Partnership formed by the Company
and Cargill Financial (or an affiliate). The Right of First Refusal Agreement
does not prohibit the Company from holding discussions with entities other than
CFSC regarding potential joint purchases of interests in loans, receivables,
real estate or other assets, provided that any such purchase is subject to
CFSC's right to participate in the Company's share of the investment. The Right
of First Refusal Agreement further provides that, subject to certain conditions,
CFSC will bear 50% of the due diligence expenses incurred by the Company in
connection with proposed asset purchases. The Right of First Refusal Agreement
is a restatement and extension of a similar agreement entered into among

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the Company, certain members of the Company's management and Cargill Financial
in 1992. The Right of First Refusal Agreement is anticipated to be extended to
January 1, 2002.

Business Strategy

Historically, Commercial Corp. has leveraged its expertise in asset
resolution and servicing by investing in a wide variety of asset types across a
broad geographic scope. Commercial Corp. continues to follow this investment
strategy and seeks expansion opportunities into new asset classes and geographic
areas when it believes it can achieve attractive risk adjusted returns. The
following are the key elements of Commercial Corp.'s business strategy in the
portfolio acquisition and resolution business:

- Niche markets. Commercial Corp. will continue to pursue profitable
private market niches in which to invest. The niche investment
opportunities that Commercial Corp. has pursued to date include (i) the
acquisition of improved or unimproved real estate, including excess
retail sites, and (ii) periodic purchases of single financial or real
estate assets from banks and other financial institutions with which
Commercial Corp. has established relationships, and from a variety of
other sellers that are familiar with the Company's reputation for acting
quickly and efficiently.

- Emphasis on smaller Portfolios. Generally, Commercial Corp. seeks
purchases of Portfolio Assets with a purchase price of less than $100
million in order to avoid large portfolio offerings that attract larger
institutional purchasers and hedge funds, which have lower threshold
return requirements and lower funding costs than Commercial Corp.

- Foreign markets. Commercial Corp. believes that the foreign markets for
distressed assets are less developed than the U.S. market, and therefore
provide a greater opportunity to achieve attractive risk adjusted
returns. Commercial Corp. has purchased Portfolio Assets in France, Japan
(sold in 1999) and Mexico and expects to continue to seek purchase
opportunities outside of the United States.

CONSUMER LENDING

The Company conducts all of its consumer receivable origination activities
through FirstCity Consumer Lending Corporation and its subsidiaries ("Consumer
Corp."). Consumer Corp.'s current focus is on the origination and servicing of
sub-prime consumer loans. Such loans are extended to borrowers who evidence an
ability and willingness to repay credit, but have experienced an adverse event,
such as a job loss, illness or divorce, or have had past credit problems, such
as delinquency, bankruptcy, repossession or charge-offs. The significant
majority of Consumer Corp.'s current business is focused on the sub-prime
automobile sector, with each loan funded after individual underwriting and
pricing of each proposed extension of credit.

Market Background

The sub-prime automobile finance business has been characterized by several
factors that the Company believes increase its likelihood of being able to
sustain a successful sub-prime automobile finance business. Within the past
several years, significant amounts of new capital have become available, thereby
allowing a large number of new market participants to originate loans to
sub-prime automobile borrowers. This increase in competition led to reduced
credit underwriting standards and lower dealer discounts as lenders sought to
maintain earnings by increasing loan origination levels. In the Company's view,
too little attention was paid to the structure of loans, the importance of
matching the discount to the expected loss per occurrence, and the special
effort required to service a sub-prime automobile loan. Because of many notable
failures, especially among mono-line automobile finance businesses, the Company
believes that the opportunity now exists to increase market share by providing a
fully underwritten loan product that utilizes risk-adjusted pricing to
franchised automobile dealerships that seek a steady source of funding supported
by meaningful and responsive service.

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Consumer Corp. Background

The Company's initial venture into the sub-prime automobile market involved
the acquisition of a distressed sub-prime automobile loan portfolio from a
secured lender. In addition to acquiring the distressed loans, the Company
acquired the equity of the company that operated the program through which the
loans had been originated. This program involved the indirect acquisition of
automobile loans from financial intermediaries that had direct contact with
automobile dealerships. The Company was required to purchase loans that
satisfied minimum contractual underwriting standards and was not permitted to
negotiate purchase discounts for a loan based on the individual risk profile of
the loan and the borrower. After operating this program for approximately 15
months, the Company concluded that the contractual underwriting standards and
purchase discounts on which the program was based were insufficient to generate
sub-prime automobile loans of acceptable quality to the Company. As a result,
the Company terminated its obligations with the financial institutions
participating in such origination program effective as of January 31, 1998.

With the benefit of the experience gained by the Company through its
initial attempt at originating acceptable sub-prime automobile loans, the
Company began, in early 1997, to explore other business models that it felt
would be successful in the current market environment. This investigation and
research resulted in the formation, during the third quarter of 1997, of
FirstCity Funding Corporation ("Funding"), 80% of which is owned by the Company
and 20% of which is owned by Funding's management team. Funding's management
team is experienced in the automobile finance business, with significant prior
experience in the sales and finance activities of franchised dealerships.
Funding's business model is predicated upon the acquisition of newly originated
sub-prime automobile finance contracts at a price that is adjusted to reflect
the expected loss per occurrence on defaulted contracts. The approach emphasizes
service to the dealership and a steady source of funding for contracts that meet
Funding's underwriting and pricing criteria. In addition, all loans are serviced
by divisions and subsidiaries of Funding ("Consumer Servicing"), which is
dedicated primarily to the servicing of consumer loans originated or acquired by
Consumer Corp.

Consumer Corp. and the management shareholders of Funding entered into a
shareholders' agreement in connection with the formation of Funding in September
1997. Commencing on the fifth anniversary of such agreement, Consumer Corp. and
the management shareholders have put and call options with respect to the stock
of Funding held by the other party. Should one of the parties decide to exercise
its option, the price will be determined based on the current market conditions
at such time. Should the parties not be able to determine a price that is
mutually agreeable, an independent appraisal will be performed to establish such
price.

During 1999, FirstCity Funding Corp. was converted to a limited
partnership, FirstCity Funding LP ("Funding"), with a newly formed FirstCity
Funding Corp. named as general partner. The effective ownership remained the
same, 80% of which is owned by the Company and 20% owned by Funding's management
team. Also, Funding purchased Consumer Servicing for an amount equal to book
value, which previously had been indirectly wholly owned.

Product Description

Consumer Corp. currently acquires and originates loans, secured by
automobiles, to borrowers who have had past credit problems or have little or no
credit experience. Such loans are individually underwritten to Consumer Corp.'s
underwriting and credit guidelines. See "-- Loan Acquisition and Underwriting."
The collateral for the loan generally is a used automobile purchased from a
franchised automobile dealership. The loans generally have a term of no more
than 60 months and generally accrue interest at the maximum rate allowed by
applicable state law.

Origination Channels

Through a sales staff managed by professionals with an extensive automobile
dealership background, Funding markets its loan products and dealership services
directly to participating franchised automobile dealerships. Funding currently
maintains approximately 1,074 automobile dealership relationships in Arizona,
California, Colorado, Florida, Georgia, Kansas, Missouri, North Carolina,
Oklahoma, South Carolina, and
8
<PAGE> 11

Texas. Near term plans call for expansion into other states as staffing levels,
licensing and training permit. Funding is targeting expansion into states that
offer attractive opportunities due to population growth, attractive consumer
lending rate environments and lender-friendly repossession and collection
remedies with respect to defaulting borrowers.

The dealership servicing and marketing staff of Funding consists of 23
marketing representatives who work with dealers that submit funding applications
to Funding. These marketing representatives call upon new dealership prospects
within the current marketing territories and work with existing dealerships to
solicit additional loan acquisition opportunities. All of the marketing staff
are full time employees of Funding and have completed an extensive training
program. In addition to the initial training, weekly updates with the marketing
representatives and monthly meetings for the entire staff are held to maintain
current knowledge of the dealership programs and product offerings.

Participating dealerships submit funding applications for each prospective
loan to Funding's home office in Dallas, Texas. Applications are reviewed and
checked for completeness and all complete applications are forwarded to a credit
analyst for review. Within two hours after receipt of an application, a
representative of Funding will notify the dealership of the terms on which it
would acquire the loan, subject to confirmation of the application data. See
"-- Loan Acquisition and Underwriting." The geographic dispersion of loans
acquired by Funding during 1999, is displayed in the following table:

<TABLE>
<CAPTION>
FISCAL YEAR
1999
-----------
<S> <C>
Texas................................................. 59%
California............................................ 11
Georgia............................................... 8
North Carolina........................................ 8
South Carolina........................................ 5
Other states.......................................... 9
---
Total loan production....................... 100%
===
</TABLE>

In addition to Funding's operations, FirstCity Consumer Finance Corporation
("Consumer Finance"), a wholly owned subsidiary of Consumer Corp., originated
loans with borrowers who had established payment records on recently originated
automobile receivables through direct marketing to the consumer. Through
contractual relationships with third parties, Consumer Finance identified loan
prospects for underwriting, documentation and funding upon final approval of a
request for credit. Consumer Finance ceased funding new loans in the third
quarter of 1999, and its activities are not significant, with 76 loans having an
aggregate principal balance of approximately $1 million outstanding at December
31, 1999.

Loan Acquisition and Underwriting

Funding acquires sub-prime automobile loans originated by franchised
dealerships under a tiered pricing system. Under its pricing and underwriting
guidelines, each loan is purchased in an individually negotiated transaction
from the selling dealership only after it has been fully underwritten and
independently verified by Funding. A staff of 90 credit and compliance personnel
in Funding's home office completes the underwriting and due diligence for each
funding application. During the compliance phase of the underwriting review,
Funding verifies all pertinent information on a borrower's credit application,
including verification of landlord information for borrowers without a mortgage.
As an additional check on the quality of the prospective loan, each borrower is
personally contacted by Funding prior to the acquisition of the loan. At such
time, all of the details of the proposed transaction are confirmed with the
borrower, including the borrower's level of satisfaction with the purchased
vehicle.

Each transaction is individually priced to achieve a risk-adjusted target
purchase price, which is expressed as a percentage of the par value of the loan.
The tiered pricing structure of Funding is designed as a guideline for
establishing minimum underwriting and pricing standards for the loans to be
acquired. The minimum amount of the discount from par for the four tiers ranges
from no discount for tier 1 loans to a 10% discount for
9
<PAGE> 12

tier 4 loans. Funding's underwriting standards do not permit the purchase of a
loan for more than its par value. Other factors impacting the tier level of a
loan include, but are not limited to, prior credit history, repossession and
bankruptcy history, open credit account status, income minimums, down payment
requirements, payment ratio tests and the contract advance amount as a
percentage of the wholesale value of the collateral vehicle. The purpose of the
tiered underwriting and pricing structure is to acquire loans that are priced in
accordance with risk characteristics and the underlying value of the collateral.
The process is designed to approve loan applications for borrowers who are
likely to pay as agreed, and to minimize the risk of loss on the disposition of
the underlying collateral in the event that a default occurs.

The following table depicts the 1999 loan characteristics by tier:

<TABLE>
<CAPTION>
TIER
-------------------------------------
1 2 3 4 TOTAL
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amount funded........................... $24,635 $42,884 $37,453 $81,190 $186,162
Number of loans......................... 1,558 2,957 2,793 6,236 13,544
Average loan to value................... 102.3% 100.8% 100.1% 99.6% 100.3%
Average purchase discount............... 9.3% 13.2% 15.3% 16.1% 14.3%
Weighted average coupon................. 18.9% 19.1% 19.2% 19.2% 19.2%
Average term of loan (in months)........ 56 55 54 54 54
Average total down payment percentage... 16.4% 18.5% 19.1% 19.8% 18.9%
</TABLE>

Funding seeks to acquire loans that have the following characteristics:

- Loans originated by a franchised dealership of new automobiles

- Loans secured by automobiles that have established resale values and a
targeted age of approximately two years

- The borrower has made a substantial down payment on the automobile, which
evidences a significant equity commitment

- The loan is underwritten to provide a debt to income ratio permitting the
borrower to comfortably afford the monthly payments

- The borrower evidences a tendency toward repairing impaired credit

- Funding's purchase price of the contract from the dealership is less than
the published wholesale value of the automobile

The average automobile financed by Funding 1999 was less than two years old
with approximately 24,000 miles. The ratio of the borrower's monthly debt
service amount to the borrower's monthly gross income was, on average, equal to
11.1%.

Financing Strategy

Funding finances its operations with a warehouse credit facility provided
by a commercial conduit with Enterprise Funding Corporation as issuer and Bank
of America, N.A. as collateral agent and majority investor for which the
principal and interest is fully secured by a credit enhancement provider. In
connection with this facility, Bank of America Securities has the right to
provide advisory and placement services to Funding. Funding has historically and
plans to continue to provide permanent financing for its acquired consumer loans
through securitizations of pools of loans totaling between $40 and $100 million.

The securitization transactions are consummated through the creation of
special purpose trusts. The loans are transferred to a trust in exchange for
certificates representing the senior interest in the securitized loans held by
the trust and, if applicable, a subordinated interest in the securitized loans.
The subordinated interests generally consist of the excess spread between the
interest and principal paid by the borrowers on the loans pooled in the
securitization and the interest and principal of the senior interests issued in
the securitization,

10
<PAGE> 13

and other unrated interests issued in the securitization. The senior interests
are subsequently sold to investors for cash. Consumer Corp. may elect to retain
the subordinated interests or may sell all or some portion of the subordinated
interests to investors for cash. Consumer Corp. retains the rights to the excess
spreads.

Upon the sale of loans in securitization transactions, the sum of the cash
proceeds received and the estimated present values of the subordinated interests
less the costs of origination and securitization and the basis in the loans sold
results in a gain recognized at the time of the securitization transaction. The
present values of the subordinated interests to be recognized by Consumer Corp.
are determined based upon prepayment, loss and discount rate assumptions that
are determined in accordance with the unique underlying characteristics of the
loans comprising each securitization.

Servicing

Consumer Servicing is responsible for the loan accounting, collection,
payment processing, skip tracing and recovery activities associated with the
Company's consumer lending activities. During 1999, Funding purchased Consumer
Servicing for an amount equal to book value, which previously had been
indirectly wholly owned. Consumer Servicing has extensive experience in
servicing automobile loans and the Company believes that Consumer Servicing is a
critical element to the Company's ultimate success in the consumer loan
business. Consumer Servicing's activities are closely integrated with the
activities of Consumer Corp. This enables Consumer Servicing to take advantage
of the information regarding the quality of originated credit that is available
from a servicer in order to assist in the evaluation and modification of product
design and underwriting criteria.

Consumer Servicing has servicing centers located in Tustin, California and
Dallas, Texas. The staffing of Consumer Servicing consists of 206 personnel,
including 169 assigned to customer service and collections. A group of 30
individuals are assigned to the special recovery activities associated with
assignments for repossession through the liquidation of the collateral. This
group also coordinates any contract reinstatements, notices of intent to dispose
of collateral and recovery of any insurance, warranty or other premium payments
subject to recovery in the event of cancellation. In addition, a portion of this
group is dedicated to asset recovery, which includes tracing of individuals who
cannot be located, seeking to collect on deficiencies, managing the storage of
repossessed vehicles prior to their disposition and physical damage claims on
collateral vehicles. An administrative staff handles the special issues
associated with borrowers in bankruptcy and the more complicated issues
associated with contracts involved in other legal disputes.

The servicing practices associated with sub-prime loans are extensive. For
example, Consumer Servicing personnel contact each borrower three days prior to
the payment due date during each of the first three months of the contract. This
process assists in avoiding first payment defaults and confirms that the
customer can be located. If a borrower is delinquent in payment, an attempt to
contact the borrower is made on the first day of delinquency. Continual contact
is attempted until the borrower is located and payment is made, or a commitment
is made to bring the contract current. If the borrower cannot be contacted, the
account may be assigned to Consumer Servicing's asset recovery staff.

If the borrower does not meet a payment commitment and has not indicated a
verifiable and reasonable intention to bring the loan current, the account is
assigned to outside agents for repossession at the thirty-third day of
delinquency. At such time, the borrower has missed two payments and has not
indicated a willingness to enter into a repayment plan. After the collateral is
repossessed, the borrower has a limited opportunity to reinstate the obligation
under applicable state law by bringing the payment current and reimbursing
Consumer Servicing for its repossession expenses. If the loan is not reinstated
within the reinstatement period, the collateral is sold by the asset liquidation
group. Repossessed automobiles are generally disposed at auction after a
thorough inspection and detailing. Historically, the Company used a third party
refurbishing center to process some of its repossessed vehicles. During 1999,
the Company experienced an immaterial loss of potential sales proceeds processed
by the third party provider. Due to these operational difficulties and in an
effort to strengthen the controls surrounding this process, the Company has
decided to process these vehicles internally. A representative of Funding
generally will attend the auction to represent Funding and ensure that the
automobile is properly represented by the auction firm.

11
<PAGE> 14

Strategy

The Company continues to evaluate a number of business opportunities in the
consumer sector, which have the capability of generating or acquiring consumer
loans that represent identifiable and predictable credit quality and whose
return thresholds match or exceed those targeted by the Company. These include
secured consumer loan products and certain aspects of direct and indirect
unsecured consumer lending. Through contacts with investment banks, business
brokers and others in the consumer lending field, the Company seeks acquisition
or merger candidates or qualified management teams with which to associate in
start-up ventures. As with other aspects of its business, the Company seeks to
be opportunistic in targeting additional consumer lending opportunities.

GOVERNMENT REGULATION

Regulation of Sub-prime Automobile Lending. Consumer Corp.'s automobile
lending activities are subject to various federal and state consumer protection
laws, including TILA, ECOA, FCRA, the Federal Fair Debt Collection Practices
Act, the Federal Trade Commission Act, the Federal Reserve Board's Regulations B
and Z, and state motor vehicle retail installment sales acts and other similar
laws that regulate the origination and collection of consumer receivables and
impact Consumer Corp.'s business. These laws, among other things, (i) require
Consumer Corp. to obtain and maintain certain licenses and qualifications, (ii)
limit the finance charges, fees and other charges on the contracts purchased,
(iii) require Consumer Corp. to provide specific disclosures to consumers, (iv)
limit the terms of the contracts, (v) regulate the credit application and
evaluation process, (vi) regulate certain servicing and collection practices,
and (vii) regulate the repossession and sale of collateral. These laws impose
specific statutory liabilities upon creditors who fail to comply with their
provisions and may give rise to defenses to the payment of the consumer's
obligation. In addition, certain of the laws make the assignee of a consumer
installment contract liable for the violations of the assignor.

Each dealer agreement contains representations and warranties by the dealer
that, as of the date of assignment, the dealer has complied with all applicable
laws and regulations with respect to each contract. The dealer is obligated to
indemnify Consumer Corp. for any breach of any of the representations and
warranties and to repurchase any non-conforming contracts. Consumer Corp.
generally verifies dealer compliance with usury laws, but does not audit a
dealer's full compliance with applicable laws. There can be no assurance that
Consumer Corp. will detect all dealer violations or that individual dealers will
have the financial ability and resources either to repurchase contracts or
indemnify Consumer Corp. against losses. Accordingly, failure by dealers to
comply with applicable laws, or with their representations and warranties under
the dealer agreement, could have a material adverse effect on Consumer Corp.

If a borrower defaults on a contract, Consumer Corp., as the servicer of
the contract, is entitled to exercise the remedies of a secured party under the
Uniform Commercial Code (the "UCC"), which typically includes the right to
repossession by self-help unless such means would constitute a breach of peace.
The UCC and other state laws regulate repossession and sales of collateral by
requiring reasonable notice to the borrower of the date, time and place of any
public sale of collateral, the date after which any private sale of the
collateral may be held and the borrower's right to redeem the financed vehicle
prior to any such sale, and by providing that any such sale must be conducted in
a commercially reasonable manner.

The Company believes that it is in compliance with applicable government
regulations relating to all aspects of the Company's lending activities,
including its loan origination activities, consumer credit transactions and
sub-prime automobile lending.

12
<PAGE> 15

COMPETITION

All of the business lines in which the Company operates are highly
competitive. Some of the Company's principal competitors in certain of its
businesses are substantially larger and better capitalized than the Company.
Because of these resources, these companies may be better able than the Company
to obtain new customers for loan production, to acquire Portfolio Assets, to
pursue new business opportunities or to survive periods of industry
consolidation.

The Company believes that it is one of the largest, independent,
full-service companies in the distressed asset business. There are, however, no
published rankings available, because many of the transactions that would be
used for ranking purposes are with private parties. Generally, there are three
aspects of the distressed asset business: due diligence, principal activities,
and servicing. The Company is a major participant in all three areas, whereas
certain of its competitors (including certain securities and banking firms) have
historically competed primarily as portfolio purchasers, as they have
customarily engaged other parties to conduct due diligence on potential
portfolio purchases and to service acquired assets, and certain other
competitors (including certain banking and other firms) have historically
competed primarily as servicing companies.

The Company believes that its ability to acquire Portfolios for its own
account and through Acquisition Partnerships will be an important aspect of the
Company's overall future growth. Acquisitions of Portfolios are often based on
competitive bidding, which involves the danger of bidding too low (which
generates no business), or bidding too high (which could win the Portfolio at an
economically unattractive price).

The sub-prime automobile finance market is highly fragmented and very
competitive. There are numerous financial services companies serving, or capable
of serving, this market, including traditional financial institutions such as
banks, thrifts, credit unions, and captive finance companies owned by automobile
manufacturers, as well as other non-traditional consumer finance companies, many
of which have significantly greater financial and other resources than the
Company. Many of these competitors also have long standing relationships with
automobile dealerships and may offer dealerships or their customers other forms
of financing, including dealer floor plan financing and leasing, which are not
provided by the Company. In seeking to establish itself as one of the financing
sources at the dealers it serves, the Company competes predominately on the
basis of its high level of dealer service and strong dealer relationships. There
can be no assurance that the Company will be able to compete successfully in
this market or against these competitors.

EMPLOYEES

The Company had 464 employees as of December 31, 1999. No employee is a
member of a labor union or party to a collective bargaining agreement. The
Company believes that its employee relations are good.

ITEM 2. PROPERTIES.

FirstCity leases all its office locations. FirstCity leases its current
headquarters building from a related party under a noncancellable operating
lease which expires December 2001. All leases of the other offices of FirstCity
and subsidiaries expire prior to 2006.

ITEM 3. LEGAL PROCEEDINGS.

On October 4, 1999, Chase Securities, Inc. filed suit alleging breach of
contractual terms outlined in an engagement letter retaining Chase Securities,
Inc. to render financial advisory services to the Company. Chase Securities,
Inc. is demanding approximately $2.4 million in actual damages, approximately $4
thousand in out of pocket costs, and attorneys fees and costs. The Company
answered these claims on December 3, 1999. A Motion for Stay pending trial and
determination of an action pending in the U.S. District Court for the Western
District of Texas was filed on December 3, 1999. This matter is in the early
stages of discovery and development, the probable outcome cannot be determined.
The Company intends to vigorously defend this suit.

13
<PAGE> 16

Periodically, FirstCity, its subsidiaries, its affiliates and the
Acquisition Partnerships are parties to or otherwise involved in legal
proceedings arising in the normal course of business. FirstCity does not believe
that there is any proceeding threatened or pending against it, its subsidiaries,
its affiliates or the Acquisition Partnerships which, if determined adversely,
would have a material adverse effect on the consolidated financial position,
results of operations or liquidity of FirstCity, its subsidiaries, its
affiliates or the Acquisition Partnerships.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1999.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

COMMON AND PREFERRED STOCK DATA

FirstCity's common stock, $.01 par value per share (the "Common Stock")
(FCFC), and adjusting rate preferred (FCFCO) stock are listed on the Nasdaq
National Market System. Its special preferred (FCFCP) stock was redeemed on
September 30, 1998. The number of common stockholders of record on March 21,
2000 was approximately 510. High and low stock prices and dividends for the
Common Stock, special preferred stock and adjusting rate preferred stock in 1999
and 1998 are displayed in the following table:

<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
MARKET PRICE CASH MARKET PRICE CASH
--------------- DIVIDENDS --------------- DIVIDENDS
QUARTER ENDED HIGH LOW PAID HIGH LOW PAID
- ------------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Common Stock:
March 31..................... $16.75 $ 8.88 -- $31.50 $27.00 --
June 30...................... 11.44 5.06 -- 33.38 27.38 --
September 30................. 6.63 0.75 -- 29.50 12.06 --
December 31.................. 2.75 1.13 -- 15.50 10.38 --
Special Preferred Stock:
March 31..................... -- -- -- $22.88 $21.88 $.7875
June 30...................... -- -- -- 22.38 21.13 .7875
September 30(1).............. -- -- -- 22.38 20.13 1.575
December 31.................. -- -- -- -- -- --
Adjusting Rate Preferred
Stock(2):
March 31..................... $20.75 $17.38 $0.525 $23.25 $21.75 $.7875
June 30...................... 18.25 15.00 0.525 23.88 21.50 .7875
September 30................. 15.75 5.00 0.525 22.75 18.25 .7875
December 31.................. 9.63 6.00 -- 19.00 14.69 .7875
</TABLE>

- ---------------

(1) Redeemed on September 30, 1998.

(2) In the third quarter of 1999, payment of dividends in respect to the
Adjusting Rate Preferred Stock was suspended.

The Company has never declared or paid a dividend on the Common Stock. The
Company currently intends to retain future earnings to finance its growth and
development and therefore does not anticipate that it will declare or pay any
dividends on the Common Stock in the foreseeable future. Any future
determination as to payment of dividends will be made at the discretion of the
Board of Directors of the Company and will depend upon the Company's operating
results, financial condition, capital requirements, general business

14
<PAGE> 17

conditions and such other factors that the Board of Directors deems relevant.
The Company's Senior Facility and substantially all of the credit facilities to
which the Company's subsidiaries and the Acquisition Partnerships are parties
contain restrictions relating to the payment of dividends and other
distributions.

ITEM 6. SELECTED FINANCIAL DATA.

Effective during the third quarter of 1999, management of the Company
adopted formal plans to discontinue the operations of Mortgage Corp and Capital
Corp. these entities comprise the operations that were previously reported as
the Company's residential and commercial mortgage banking business. Because the
Company formally adopted plans to discontinue the operations of Mortgage Corp.
and Capital Corp., and operations at each such entity have either ceased,or are
expected to cease in the near future (no later than one year following the
adoption of the plan to discontinue operations), the results of the current and
historical operations have been reflected as discontinued operations.

The Selected Financial Data presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this Report and with the related Consolidated
Financial Statements and Notes thereto under Item 8 of this Report.

SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 58,928 $ 51,544 $ 63,896 $ 61,469 $ 39,523
Expenses.................................... 56,619 51,719 49,482 42,077 23,854
Earnings (loss) from continuing
operations................................ (4,241) 785 27,623 35,405 14,733
Earnings (loss) from discontinued
operations................................ (103,915) (20,977) 8,005 3,724 511
Net earnings (loss)......................... (108,156) (20,192) 35,628 39,129 15,244
Redeemable preferred dividends.............. 2,568 5,186 6,203 7,709 3,876
Net earnings (loss) to common
shareholders(1)........................... (110,724) (25,378) 29,425 31,420 11,368
Net earnings (loss) from continuing
operations per common share --
Basic(1).................................. (0.73) (0.58) 3.28 4.26 2.08
Diluted(1)................................ (0.73) (0.58) 3.25 4.22 2.08
Dividends per common share.................. -- -- -- -- --
At year end:
Total assets.............................. 230,622 336,643 317,146 237,802 315,426
Total notes payable....................... 169,792 165,922 152,216 91,924 85,518
Preferred stock........................... 26,965 26,323 41,908 53,617 55,555
Total common equity......................... 26,587 136,955 112,758 84,802 52,788
</TABLE>

- ---------------

(1) Includes $1.2 million, $13.6 million and $16.2 million, respectively, of
deferred tax benefits related to the recognition of benefits to be realized
from net operating loss carryforwards (NOLs) in 1998, 1997 and 1996, and a
deferred tax provision of $4.9 million in 1999.

15
<PAGE> 18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

The Company is a diversified financial services company engaged in
Portfolio Asset acquisition and resolution and consumer lending. The Portfolio
Asset acquisition and resolution business involves acquiring Portfolio Assets at
a discount to Face Value and servicing and resolving such Portfolios in an
effort to maximize the present value of the ultimate cash recoveries. The
Company also seeks opportunities to originate and retain high yield commercial
loans to businesses and to finance real estate projects that are unable to
access traditional lending sources. The consumer lending business involves the
acquisition, origination, warehousing, securitization and servicing of consumer
receivables. The Company's current consumer lending operations are focused on
the acquisition of sub-prime automobile receivables.

During 1999, the Company adopted plans of discontinuation for its mortgage
business operations, which consist of Mortgage Corp. and Capital Corp. The
Company realized losses in 1999 from the discontinued operations in the amount
of $103.9 million. The components of this loss are losses from operations of
$40.7 million, the write-off of the Company's investment in Mortgage Corp. of
$50.5 million, write down in the investment in Capital Corp. of $15.6 million,
offset by the future operations, net of reserves, of the residual assets of the
discontinued business of approximately $2.9 million. The anticipated disposition
is subject to many assumptions, including the financial and general market
conditions. Changes in these and other factors could materially effect the
results of this plan of discontinuation. Furthermore, changes in conditions
could dictate changes in the plan of discontinuation, which could result in a
material difference in the results of discontinuation.

On October 14, 1999, Mortgage Corp. filed for protection under Chapter 11
of the Bankruptcy Code. Mortgage Corp.'s filings with the bankruptcy court
reflected that it had the stated assets of approximately $95 million and stated
liabilities of approximately $98 million. FirstCity has not guaranteed the
indebtedness of Mortgage Corp. and has previously reached agreement with its
corporate revolving lenders to permanently waive any events of default related
to Mortgage Corp., including bankruptcy. Neither FirstCity nor any of its other
affiliates or business units are contemplating filing for bankruptcy protection.

The Company posted a loss from continuing operations of $4.2 million in
1999. After dividends on the preferred stock and loss from discontinued
operations, the net loss available to common shareholders was $110.7 million or
$13.33 per common share for 1999. Such loss was primarily comprised of the loss
from discontinued operations of $103.9 million.

The Company's financial results are affected by many factors including
levels of and fluctuations in interest rates, fluctuations in the underlying
values of real estate and other assets, and the availability and prices for
loans and assets acquired in all of the Company's businesses. The Company's
business and results of operations are also affected by the availability of
financing with terms acceptable to the Company and the Company's access to
capital markets, including the securitization markets.

As a result of the significant period to period fluctuations in the
revenues and earnings of the Company's Portfolio Asset acquisition and
resolution business, and the timing of securitization transactions of Consumer
Corp., period to period comparisons of the Company's results of continuing
operations may not be meaningful.

16
<PAGE> 19

ANALYSIS OF REVENUES AND EXPENSES

The following table summarizes the revenues and expenses of each of the
Company's business segments and presents the contribution that each business
makes to the Company's operating margin.

ANALYSIS OF REVENUES AND EXPENSES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
------------ ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
PORTFOLIO ASSET ACQUISITION AND RESOLUTION:
Revenues:
Gain on resolution of Portfolio Assets.......... $ 4,054 $ 9,208 $24,183
Equity in earnings of Acquisition Partnerships
and Servicing Entities........................ 11,318 12,827 7,605
Servicing fees(1)............................... 3,850 3,062 11,513
Other........................................... 6,275 4,185 4,402
--------- -------- -------
Total...................................... 25,497 29,282 47,703
Expenses:
Salaries and benefits........................... 4,864 4,619 5,353
Interest on notes payable....................... 3,710 5,118 7,084
Asset level expenses, occupancy, data processing
and other..................................... 6,217 7,204 12,103
--------- -------- -------
Total...................................... 14,791 16,941 24,540
--------- -------- -------
Operating contribution before direct taxes......... $ 10,706 $ 12,341 $23,163
========= ======== =======
Operating contribution, net of direct taxes........ $ 10,620 $ 12,284 $22,970
========= ======== =======
CONSUMER LENDING:
Revenues:
Gain on sale of automobile loans................ $ 10,280 $ 7,214 $ --
Interest income................................. 17,787 10,035 10,182
Servicing fees.................................. 5,086 2,705 553
Other........................................... 171 106 (454)
--------- -------- -------
Total...................................... 33,324 20,060 10,281
Expenses:
Salaries and benefits........................... 8,053 5,602 2,959
Provision for loan losses and impairment of
residual interests............................ 4,302 9,201 6,613
Interest on notes payable....................... 3,932 3,196 3,033
Occupancy, data processing and other............ 11,283 5,819 3,272
--------- -------- -------
Total...................................... 27,570 23,818 15,877
--------- -------- -------
Operating contribution (loss) before direct
taxes........................................... $ 5,754 $ (3,758) $(5,596)
========= ======== =======
Operating contribution (loss), net of direct
taxes........................................... $ 5,689 $ (3,758) $(5,599)
========= ======== =======
Total operating contribution, net of direct
taxes........................................... $ 16,309 $ 8,526 $17,371
========= ======== =======
</TABLE>

17
<PAGE> 20

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
------------ ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CORPORATE OVERHEAD:
Revenues:
Interest income on Class A Certificate(2)....... $ -- $ -- $ 3,553
Other........................................... 107 2,202 2,359
--------- -------- -------
Total...................................... 107 2,202 5,912
Corporate interest expense......................... (8,649) (3,774) (1,129)
Salaries and benefits, occupancy, professional and
other income and expenses, net.................. (7,108) (7,358) (6,505)
Deferred tax benefit (provision)................... (4,900) 1,189 13,592
Harbor Merger related expenses..................... -- -- (1,618)
--------- -------- -------
Earnings (loss) from continuing operations......... (4,241) 785 27,623
Earnings (loss) from discontinued operations....... (103,915) (20,977) 8,005
--------- -------- -------
Net earnings (loss)................................ (108,156) (20,192) 35,628
Preferred dividends................................ (2,568) (5,186) (6,203)
--------- -------- -------
Net earnings (loss) to common shareholders......... $(110,724) $(25,378) $29,425
========= ======== =======
SHARE DATA:
Basic earnings (loss) per common share are as
follows:
Earnings (loss) from continuing operations
before accounting change per common share..... $ (0.73) $ (0.58) $ 3.28
Discontinued operations per common share........ (12.51) (2.77) 1.23
Cumulative effect of accounting change.......... (0.09) -- --
Net earnings (loss) per common share............ (13.33) (3.35) 4.51
Weighted average common shares outstanding...... 8,307 7,584 6,518
Diluted earnings (loss) per common share are as
follows:
Earnings (loss) from continuing operations
before accounting change per common share..... $ (0.73) $ (0.58) $ 3.25
Discontinued operations per common share........ (12.51) (2.77) 1.21
Cumulative effect of accounting change.......... (0.09) -- --
Net earnings (loss) per common share............ (13.33) (3.35) 4.46
Weighted average common shares outstanding...... 8,307 7,584 6,591
</TABLE>

- ---------------

(1) Includes $6.8 million in 1997 as a result of terminating the Investment
Management Agreement with FirstCity Liquidating Trust.

(2) Represents dividends on preferred stock accrued or paid prior to June 30,
1997.

PORTFOLIO ASSET ACQUISITION AND RESOLUTION

Revenues at Commercial Corp. consist primarily of gain on disposition of
assets, interest income on performing assets and equity in earnings of
affiliated Acquisition Partnerships. In addition, Commercial Corp. derives
servicing fees from Acquisition Partnerships for the servicing activities
performed related to the assets held in the Acquisition Partnerships. Following
the Merger, Commercial Corp. serviced assets held in an affiliated liquidating
trust created for the benefit of former FCBOT shareholders (the "Trust") and
derived servicing fees for its activities under a servicing agreement between
the Trust and Commercial Corp. During the first quarter of 1997, the Trust
terminated the servicing agreement and paid Commercial Corp. a termination
payment of $6.8 million representing the present value of servicing fees
projected to have been earned by Commercial Corp. upon the liquidation of the
assets of the Trust, which was expected to occur principally in 1997.

18
<PAGE> 21

In its Portfolio Asset acquisition and resolution business, Commercial
Corp. acquires Portfolio Assets that are designated as nonperforming, performing
or real estate. Each Portfolio is accounted for as a pool and not on an
individual asset basis. To date, a substantial majority of the Portfolio Assets
acquired by Commercial Corp. have been designated as nonperforming. Once a
Portfolio has been designated as either nonperforming or performing, such
designation is not changed regardless of the performance of the assets
comprising the Portfolio. The Company recognizes revenue from Portfolio Assets
and Acquisition Partnerships based on proceeds realized from the resolution of
Portfolio Assets, which proceeds have historically varied significantly and
likely will continue to vary significantly from period to period. The following
table presents selected information regarding the revenues and expenses of the
Company's Portfolio Asset acquisition and resolution business.

ANALYSIS OF SELECTED REVENUES AND EXPENSES
PORTFOLIO ASSET ACQUISITION AND RESOLUTION

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
GAIN ON RESOLUTION OF PORTFOLIO ASSETS:
Average investment:
Nonperforming Portfolios........................... $29,822 $41,873 $61,764
Performing Portfolios.............................. 15,618 14,629 9,759
Real estate Portfolios............................. 9,154 15,919 21,602
Gain on resolution of Portfolio Assets:
Nonperforming Portfolios........................... $ 3,047 $ 6,112 $20,288
Performing Portfolios.............................. -- 299 --
Real estate Portfolios............................. 1,007 2,797 3,895
------- ------- -------
Total......................................... $ 4,054 $ 9,208 $24,183
Interest income on performing Portfolios.............. $ 2,397 $ 2,140 $ 2,052
Gross profit percentage on resolution of Portfolio
Assets:
Nonperforming Portfolios........................... 19.8% 23.6% 27.8%
Performing Portfolios.............................. -- 8.0% --
Real estate Portfolios............................. 23.7% 20.9% 27.9%
Weighted average gross profit percentage........... 20.7% 21.4% 27.8%
Interest yield on performing Portfolios............... 15.4% 14.1% 21.0%
SERVICING FEE REVENUES:................................. $ 3,850 $ 3,062 $11,513
PERSONNEL:
Personnel expenses.................................... $ 4,864 $ 4,619 $ 5,353
Number of personnel (at period end):
Production......................................... 12 12 9
Servicing.......................................... 60 64 68
INTEREST EXPENSE:
Average debt.......................................... $49,078 $71,091 $85,262
Interest expense...................................... 3,710 5,118 7,084
Average yield......................................... 7.6% 7.2% 8.3%
</TABLE>

Nonperforming Portfolio Assets

Nonperforming Portfolio Assets consist primarily of distressed loans and
loan related assets, such as foreclosed-upon collateral. Portfolio Assets are
designated as nonperforming unless substantially all of the assets comprising
the Portfolio are being repaid in accordance with the contractual terms of the
underlying loan agreements. Commercial Corp. acquires such assets on the basis
of an evaluation of the timing and amount of cash flow expected to be derived
from borrower payments or disposition of the underlying asset securing the loan.
On a monthly basis, the amortized cost of each nonperforming Portfolio is
evaluated for

19
<PAGE> 22

impairment. A valuation allowance is established for any impairment identified
with provisions to establish such allowance charged to earnings in the period
identified.

All nonperforming Portfolio Assets are purchased at substantial discounts
from their Face Value. Net gain on the resolution of nonperforming Portfolio
Assets is recognized to the extent that proceeds collected on the Portfolio
exceed a pro rata portion of allocated costs of the resolved Portfolio Assets.
Proceeds from the resolution of Portfolio Assets that are nonperforming are
recognized as cash is realized from the collection, disposition and other
resolution activities associated with the Portfolio Assets. No interest income
or any other yield component of revenue is recognized separately on
nonperforming Portfolio Assets.

Performing Portfolio Assets

Performing Portfolio Assets consist of consumer and commercial loans
acquired at a discount from the aggregate amount of Face Value. Portfolio Assets
are classified as performing if substantially all of the loans comprising the
Portfolio are being repaid in accordance with the contractual terms of the
underlying loan agreements. On a monthly basis, the amortized cost of each
performing Portfolio is evaluated for impairment. A valuation allowance is
established for any identified impairment with provisions to establish such
allowance charged to earnings in the period identified.

Interest income is recognized when accrued in accordance with the
contractual terms of the loans. The accrual of interest is discontinued once a
loan becomes past due 90 days or more. Acquisition discounts for the Portfolio
Assets as a whole are accreted as an adjustment to yield over the estimated life
of the Portfolio.

Real Estate Portfolios

Commercial Corp. also acquires Portfolios comprised solely of real estate.
Real estate Portfolios are recorded at the lower of cost or fair value less
estimated costs to sell. Costs relating to the development or improvement are
capitalized and costs relating to holding assets are charged to expense as
incurred. Rental income, net of expenses, is recognized as revenue when
received. Gains and losses are recognized based on the allocated cost of each
specific real estate asset.

Equity in Earnings of Acquisition Partnerships

Commercial Corp. accounts for its investments in Acquisition Partnerships
using the equity method of accounting. This accounting method generally results
in the pass-through of its pro rata share of earnings from the Acquisition
Partnerships' activities as if it had a direct investment in the underlying
Portfolio Assets held by the Acquisition Partnership. The revenues and earnings
of the Acquisition Partnerships are determined on a basis consistent with the
accounting methodology applied to nonperforming, performing and real estate
Portfolios described in the preceding paragraphs.

Distributions of cash flow from the Acquisition Partnerships are a function
of the terms and covenants of the loan agreements related to the secured
borrowings of the Acquisition Partnerships. Generally, the terms of the
underlying loan agreements permit some distribution of cash flow to the equity
partners so long as loan to cost and loan to value relationships are in
compliance with the terms and covenants of the applicable loan agreement. Once
the secured borrowings of the Acquisition Partnerships are fully paid, all cash
flow in excess

20
<PAGE> 23

of operating expenses is available for distribution to the equity partners. The
following chart presents selected information regarding the revenues and
expenses of the Acquisition Partnerships.

ANALYSIS OF SELECTED REVENUES AND EXPENSES
ACQUISITION PARTNERSHIPS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Gain on resolution of Portfolio Assets............. $ 51,035 $ 57,628 $ 33,398
Gross profit percentage on resolution of Portfolio
Assets.......................................... 40.9% 33.9% 18.7%
Interest income.................................... $ 16,409 $ 9,714 $ 8,432
Other income....................................... 1,914 3,127 1,053
INTEREST EXPENSE:
Interest expense................................... 15,626 13,081 10,294
Average debt....................................... 159,827 159,145 111,422
Average yield...................................... 9.8% 8.2% 9.2%
OTHER EXPENSES:
Servicing fees..................................... $ 6,391 $ 5,360 $ 4,984
Legal.............................................. 2,178 2,557 1,957
Property protection................................ 3,109 5,898 3,956
Other.............................................. 5,599 9,867 1,575
-------- -------- --------
Total other expenses....................... 17,277 23,682 12,472
-------- -------- --------
Net earnings............................... $ 36,455 $ 33,706 $ 20,117
======== ======== ========
Equity in earnings of Acquisition Partnerships....... $ 11,444 $ 12,827 $ 7,605
Equity in loss of Servicing Entities................. (126) -- --
-------- -------- --------
$ 11,318 $ 12,827 $ 7,605
======== ======== ========
</TABLE>

Servicing Fee Revenues

Commercial Corp. derives fee income for its servicing activities performed
on behalf of the Acquisition Partnerships. In connection with the Acquisition
Partnerships, Commercial Corp. generally earns a servicing fee of between 3% and
8% of gross cash collections generated by the Acquisition Partnerships, rather
than a periodic management fee based on the Face Value of the assets being
serviced. The rate of servicing fee charged is a function of the average Face
Value of the assets within each Portfolio being serviced (the larger the average
Face Value of the assets in a Portfolio, the lower the fee percentage within the
prescribed range).

21
<PAGE> 24

CONSUMER LENDING

The primary components of revenue derived by Consumer Corp. are interest
income and gain on sale of loans. The primary expenses of Consumer Corp. are
salaries and benefits, provision for loan losses and impairment of residual
interests and interest expense. The following chart presents selected
information regarding the revenues and expenses of Consumer Corp.'s consumer
lending business.

ANALYSIS OF SELECTED REVENUES AND EXPENSES
CONSUMER LENDING

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST INCOME:
Average loans and investments:
Auto............................................... $56,540 $35,880 $48,682
Investments........................................ 41,864 26,720 4,278
Interest income:
Auto............................................... 11,811 7,542 9,067
Investments........................................ 5,487 2,181 548
Average yield:
Auto............................................... 20.9% 21.0% 18.6%
Investments........................................ 13.1% 8.2% 12.8%
SERVICING FEE REVENUES.................................. $ 5,086 $ 2,705 $ 553
PERSONNEL:
Personnel expenses.................................... $ 8,053 $ 5,602 $ 2,959
Number of personnel (at period end):
Production......................................... 142 93 53
Servicing.......................................... 206 110 53
INTEREST EXPENSE:
Average debt.......................................... $53,948 $36,302 $34,129
Interest expense...................................... 3,932 3,196 3,033
Average yield......................................... 7.3% 8.8% 8.9%
</TABLE>

Interest Income

Interest income is accrued on originated and acquired loans at the
contractual rate of interest of the underlying loan. The accrual of interest
income is discontinued once a loan becomes 90 days past due.

Gain on Sale of Loans

Consumer Corp. accumulates and pools automobile loans acquired from
franchised dealerships for sales in public and private securitization
transactions. Such transactions result in the recognition of gains to the extent
that the proceeds received (including the estimated value of the retained
subordinated interests) exceed the basis of the automobile loans and the costs
associated with the securitization process. When the automobile loans are
securitized and sold, the retained interests are valued at the discounted
present value of the cash flows expected to be realized over the anticipated
average life of the assets sold after future estimated credit losses, estimated
prepayments, servicing fees and other securitization fees related to the loans
sold. The discounted present value of such interests is computed using Consumer
Corp.'s assumptions of market discount rates, prepayment speeds, default rates,
credit losses and other costs based upon the unique underlying characteristics
of the automobile loans comprising each securitization.

Consumer Corp. completed two securitization transactions in 1999, FAR
1999-1 and FAR 1999-2. Approximate aggregate loss assumptions were 10.7% and
11.0%, respectively, of the outstanding principal balance of underlying loans.
In its securitization transactions completed in 1998, NAF 1998-1, FAR 1998-2

22
<PAGE> 25

and FAR 1998-3, Consumer Corp. assumed that losses would approximate an
aggregate of 19.8%, 15.4% and 11.2%, respectively, of the outstanding principal
balance of the underlying loans. Consumer Corp. calculated the present value of
future cash flows from the securitizations using discount rates ranging from
7.3% (on one rated security) to 15% per year and prepayment speeds ranging from
10% to 15%.

Provision for Loan Losses and Impairment of Residual Interests

The carrying value of consumer loans is evaluated on a monthly basis for
impairment. A valuation allowance is established for any impairment identified
with provisions to augment the allowance charged to earnings in the period
identified. The evaluation of the need for an allowance is determined on a pool
basis, with each pool being the loans originated or acquired during a quarterly
period of production or acquisition. Loans generally are acquired at a discount
from the Face Value of the loan with the acquisition discount established as an
allowance for losses at the acquisition date of the loan. If the initially
established allowance is deemed to be insufficient, additional allowances are
established through provisions charged to earnings.

During 1997, the operating margin of Consumer Corp. was significantly
impacted by provisions for loan losses in the amount of approximately $6.6
million related to the loans originated in Consumer Corp.'s original sub-prime
auto receivable business. The Company's initial venture into the sub-prime
automobile market involved the acquisition of a distressed sub-prime portfolio
from a secured lender. Following the acquisition of the portfolio, the Company
began the acquisition of additional loans on an indirect basis from financial
institutions who originated loans pursuant to contractual agreements with a
subsidiary of Consumer Corp. The Company concluded that the contractual
underwriting standards and the purchase discounts on which the initial program
was based were insufficient to generate automobile loans of acceptable quality
to the Company. As a result, the Company terminated its obligations with the
financial institutions participating in the original origination program
effective January 31, 1998. The continued flow of production into 1998 under
this program resulted in the Company making provisions for loan losses and
impairment of residual interests totaling $9.2 million for the year, the
majority of which can be attributed to these loans. In 1999, these loans
continued in their lackluster performance and were again principally responsible
for $4.3 million in provisions for loan losses and impairment of residual
interests.

Based upon the experience gained with its initial consumer origination
program, the Company undertook to develop an origination and underwriting
approach that would give Consumer Corp. significantly greater control over the
origination and pricing standards governing its consumer lending activities. The
formation of Funding resulted from these development activities. The
underwriting process and purchase discount methodology employed by Funding has
significantly changed the underwriting criteria and purchase standards of
Consumer Corp. from the methodology employed during the majority of 1996 and
1997. In Funding's case, the objectives established for purchasing loans from
originating dealers are designed to result in the purchase discount equaling or
exceeding the expected loss for all loans acquired.

INCOME TAXES

As a result of the Merger, the Company has substantial federal NOLs, which
can be used to offset the tax liability associated with the Company's pre-tax
earnings until the earlier of the expiration or utilization of such NOLs. The
Company accounts for the benefit of the NOLs by recording the benefit as an
asset and then establishing an allowance to value the net deferred tax asset at
a value commensurate with the Company's expectation of being able to utilize the
recognized benefit in the foreseeable future. Such estimates are reevaluated on
a quarterly basis with the adjustment to the allowance recorded as an adjustment
to the income tax expense generated by the quarterly operating results.
Significant events that change the Company's view of its currently estimated
ability to utilize the tax benefits, such as the Harbor Merger in the third
quarter of 1997, result in substantial changes to the estimated allowance
required to value the deferred tax benefits recognized in the Company's periodic
financial statements. Due to the evaluation of the recoverability of the
deferred tax asset recognized related to the mortgage banking operations, the
Company increased its valuation allowance by $4.9 million in 1999. Similar
events could occur in the future, and would impact the recognition of the
Company's estimate of the required valuation allowance associated with its NOLs.
If there are changes in the estimated level of the required reserve, net
earnings will be affected accordingly.
23
<PAGE> 26

Results of operations for 1998 were nominally impacted by the effect of
recording a deferred tax benefit of $1.2 million to recognize the benefit
related to NOLs. Earnings for 1997 were significantly increased by the
recognition of tax benefits totaling $13.6 million resulting from the Company's
reassessment of the valuation allowance related to its NOL asset. Realization of
the asset is dependent upon generating sufficient taxable earnings to utilize
the NOL. Prior to 1996, the deferred tax asset resulting from the Company's NOL
was entirely offset by its valuation reserve. In 1997 and 1996, the valuation
reserve was adjusted based on the Company's estimate of its future pre-tax
income.

FIRSTCITY LIQUIDATING TRUST AND EXCHANGE OF PREFERRED STOCK

In connection with the Merger, the Company received the Class A Certificate
of the Trust (the "Class A Certificate"). Distributions from the Trust in
respect of the Class A Certificate were used to retire the senior subordinated
notes of the Company and to pay dividends on, and repurchase some of, the
special preferred stock of the Company (the "Special Preferred"). Pursuant to a
June 1997 settlement agreement with the Company, the Trust's obligation to the
Company under the Class A Certificate was terminated (other than the Trust's
obligation to reimburse the Company for certain expenses) in exchange for the
Trust's agreement to pay the Company an amount equal to $22.75 per share for the
1,923,481 shares of Special Preferred outstanding at June 30, 1997, the 1997
second quarter dividend of $0.7875 per share, and 15% interest from June 30,
1997 on any unpaid portion of the settlement agreement. Under such agreement,
the Company assumed the obligation for the payment of the liquidation preference
amount and the future dividends on the Special Preferred. The Trust distributed
$44.1 million to the Company under the settlement agreement.

In June 1997, the Company began an offer to exchange one share of newly
issued adjusting rate preferred stock ("Adjusting Rate Preferred") for each
outstanding share of Special Preferred. The Company completed such exchange
offer in the third quarter of 1997 pursuant to which 1,073,704 shares of Special
Preferred were tendered for a like number of shares of Adjusting Rate Preferred.
An additional 149,197 shares were exchanged in 1998. The remaining Special
Preferred was redeemed on September 30, 1998 for $14.7 million plus accrued
dividends. The Adjusting Rate Preferred has a redemption value of $21.00 per
share and a 15% annual dividend rate through September 30, 1998, at which time
the dividend rate is reduced to 10% per annum. The Adjusting Rate Preferred is
redeemable by the Company on or after September 30, 2003, with a mandatory
maturity date of September 30, 2005. In the third quarter of 1999, dividends
were suspended.

The redemption by the Trust of its obligation on the Class A Certificate
represented a premium over the redemption value of the Special Preferred, which
was reflected as a deferred credit in the Company's financial statements. The
deferred credit was accreted to income over the weighted average life of the
Special Preferred and the Adjusting Rate Preferred through September 30, 1998.

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of the Company (including the Notes
thereto) included elsewhere in this Annual Report on Form 10-K.

1999 COMPARED TO 1998

The Company reported a net loss of $108.2 million in 1999 (including a
deferred tax provision of $4.9 million) compared to a loss of $20.2 million in
1998 (including a $1.2 million deferred tax benefit from NOLs). Net loss to
common shareholders was $110.7 million in 1999 compared to a loss of $25.4
million in 1998. On a per share basis, net loss attributable to common
shareholders was $13.33 in 1999 compared to $3.35 in 1998. The primary factor
contributing to the loss for 1999 was losses from discontinued mortgage
operations of $103.9 million or $12.51 per share for 1999 as compared to losses
of $21.0 million or $2.77 per share in 1998. Additionally, an accounting change
related to SOP 98-5 resulted in a loss of $.8 million in 1999 or $0.09 per
share.

24
<PAGE> 27

Portfolio Asset Acquisition and Resolution

Commercial Corp.'s year end investment in Portfolio Assets decreased to
$39.4 million in 1999 from $68.4 million in 1998. Commercial Corp., through its
investment in Acquisition Partnerships invested $11.2 million in equity in
Portfolio Assets in 1999 compared to $28.5 million in 1998. Such investments
represented Commercial Corp.'s share of Portfolio Assets acquired totaling
$210.8 million and $139.7 million for 1999 and 1998, respectively.

Gain on resolution of Portfolio Assets. Proceeds from the resolution of
Portfolio Assets decreased by 54% to $19.6 million in 1999 from $43.0 million in
1998. The net gain on resolution of Portfolio Assets decreased by 56% to $4.1
million in 1999 from $9.2 million in 1998 as the result of lower collections.
The average gross profit percentage on the resolution of Portfolio Assets in
1999 was 20.7% as compared to 21.4% in 1998.

Equity in earnings of Acquisition Partnerships and Servicing
Entities. Proceeds from the resolution of Portfolio Assets for the Acquisition
Partnerships decreased by 27% to $125 million in 1999 from $170 million in 1998
while the gross profit percentage increased to 40.9% in 1999 from 33.9% in 1998.
Interest income rose $6.7 million in 1999. Other expenses of the Acquisition
Partnerships decreased by $6.4 million in 1999 generally reflecting costs
associated with the resolution of Portfolio Assets in Europe which generated
proceeds of $62.2 million. The net result was an overall increase in the net
income of the Acquisition Partnerships of 8.2% to $36.5 million in 1999 from
$33.7 million in 1998. However, Commercial Corp.'s equity earnings from
Acquisition Partnerships decreased by 12% to $11.3 million in 1999 from $12.8
million in 1998 due primarily to lower equity interests in Portfolios purchased
through Acquisition Partnerships during 1999 and at the end of 1998.

Servicing fee revenues. Servicing fees increased by 26% to $3.9 million in
1999 from $3.1 million in 1998 primarily as a result of collections from the
acquisition partnership in Mexico formed at year-end 1998.

Other revenues. Other revenues increased by 50% to $6.3 million in 1999
from $4.2 million in 1998 due to $2.2 million of gains recognized in 1999 from
sales of investments in Acquisition Partnerships in Japan and France.

Operating expenses. Operating expenses declined by 13% to $14.8 million in
1999 from $16.9 million in 1998 primarily as a result of reduced interest
expense and lower asset level expenses.

Salaries and benefits were relatively flat year to year.

Interest on notes payable declined $1.4 million or 28% due to lower debt
levels.

Asset level expenses, occupancy, data processing and other expenses
decreased by 14% to $6.2 million in 1999 from $7.2 million in 1998 as a result
of lower investments in Portfolio Assets and the consolidation of servicing
offices in 1999.

Consumer Lending

Gain on sale of automobile loans. In 1999, Consumer Corp. realized a gain
of $10.3 million on the sale of automobile loans as compared to $7.2 million in
1998, primarily due to higher purchase discounts associated with the underlying
loans sold into the 1999 securitizations.

Interest and other income. Interest income increased by 77% to $17.8
million in 1999 from $10.0 million in 1998, reflecting increased levels of loan
origination activity and an increase in the average balance of aggregate loans
and investments held by Consumer Corp. during 1999. Servicing fees increased
$2.4 million or 88% due to increased service fee revenue from securitization
trusts.

Operating expenses. Operating expenses increased by 16% to $27.6 million in
1999 from $23.8 million in 1998 primarily as a result of increased operating
activity due to higher levels of loan fundings and servicing portfolio.

25
<PAGE> 28

Salaries and benefits increased by $2.5 million or 44% as a result of the
increased levels of operating activity.

Provision for loan losses and impairment on residual interests decreased by
$4.9 million or 53% from 1998 as a result of decreased losses in the NAF
originated Auto Receivable residuals.

Interest expense increased by 23% to $3.9 million in 1999 from $3.2 million
in 1998 as a result of a higher volume of debt.

Occupancy, data processing and other expenses increased by 94% to $11.3
million in 1999 from $5.8 million in 1998 as a result of increased levels of
operating activity.

Other Items Affecting Net Earnings

The following items affect the Company's overall results of operations and
are not directly related to any one of the Company's businesses discussed above.

Corporate interest expense. Company level interest expense increased by
129% to $8.6 million in 1999 from $3.8 million in 1998 as a result of higher
volumes of debt associated with the equity required to purchase Portfolio
Assets, equity interests in Acquisition Partnerships and capital support to
operating subsidiaries.

Corporate overhead. Salary and benefits decreased 23% to $2.7 million in
1999 due to a reimbursement of salaries for certain corporate employees who
worked on special projects for other entities. Other overhead expenses were
flat, including a write-off of $.8 million of organization costs in accordance
with SOP 98-5. Additionally, during the first nine months of 1998 the Company
recognized deferred premium income of $2.1 million related to the redemption of
Special Preferred Stock.

Income taxes. Federal income taxes are provided at a 35% rate applied to
taxable income (loss) and are offset by NOLs that the Company believes are
available. The tax benefit of the NOLs is recorded to the extent such is
expected to be realized in future periods. A valuation allowance is established
for the difference between the amount of NOLs available and the amount expected
to be utilized. The Company recorded a deferred tax provision of $4.9 million to
increase the valuation allowance on the deferred tax asset (based on an
evaluation of the realization of income from the discontinued mortgage banking
operations) in 1999 as compared to a benefit of $1.2 million in 1998.

1998 COMPARED TO 1997

The Company reported a net loss of $20.2 million in 1998 (including a $1.2
million deferred tax benefit from NOLs) compared to earnings of $35.6 million
(including a $13.6 million deferred tax benefit from NOLs) in 1997. Net loss to
common shareholders was $25.4 million in 1998 compared to net earnings of $29.4
million in 1997. On a per share basis, basic net loss attributable to common
shareholders was $3.35 in 1998 compared to net earnings of $4.51 in 1997.
Diluted net loss per common share was $3.35 in 1998 compared to net earnings of
$4.46 ($2.40 excluding the deferred tax benefit from NOLs) in 1997. The primary
factor contributing to the 1998 loss was losses from discontinued mortgage
operations of $21.0 million or $2.77 per share in 1998 as compared to mortgage
operation earnings of $8.0 million or $1.21 per diluted share in 1997. The 1997
results reflect the positive effect of the $6.8 million, or $1.03 per share,
payment from the Trust in settlement of the Investment Management Agreement.

Portfolio Asset Acquisition and Resolution

Commercial Corp. purchased $139.7 million of Portfolio Assets during 1998
for its own account and through the Acquisition Partnerships compared to $183.2
million of acquisitions in 1997. Commercial Corp.'s investment in Portfolio
Assets decreased to $68.4 million in 1998 from $90.0 million in 1997. Commercial
Corp. invested $28.5 million in equity in Portfolio Assets in 1998 compared to
$37.1 million in 1997.

Gain on resolution of Portfolio Assets. Proceeds from the resolution of
Portfolio Assets decreased 51% from 1997. The net gain on resolution of
Portfolio Assets decreased by 62% to $9.2 million in 1998 from $24.2 million in
1997 as the result of reduced collections and a lower gross profit percentage in
1998. The
26
<PAGE> 29

weighted average gross profit percentage on the resolution of Portfolio Assets
in 1998 was 21.4% as compared to 27.8% in 1997.

Equity in earnings of Acquisition Partnerships and Servicing
Entities. Proceeds from the resolution of Portfolio Assets for the Acquisition
Partnerships decreased by 4.5% to $170 million in 1998 from $178 million in 1997
while the gross profit percentage increased to 33.9% in 1998 from 18.7% in 1997.
Other expenses of the Acquisition Partnerships increased by $11.2 million in
1998 generally reflecting costs associated with the resolution of Portfolio
Assets in Europe which generated proceeds of $98.7 million. The net result was
an overall increase in the net income of the Acquisition Partnerships of 68% to
$33.7 million in 1998 from $20.1 million in 1997. As a result, Commercial
Corp.'s equity earnings from Acquisition Partnerships increased by 69% to $12.8
million in 1998 from $7.6 million in 1997.

Servicing fee revenues. Servicing fees reported during 1997 included the
receipt of a $6.8 million cash payment related to the early termination of a
servicing agreement between the Company and the Trust, under which the Company
serviced the assets of the Trust. The $6.8 million payment represents the
present value of servicing fees projected to have been earned by Commercial
Corp. upon liquidation of the Trust assets, which was expected to occur
principally in 1997. Excluding fees related to Trust assets, servicing fees
decreased by 35% to $3.1 million in 1998 from $4.7 million in 1997 as a result
of lower domestic collection levels in the Acquisition Partnerships and
affiliated entities.

Other revenues. Other revenues were relatively flat year to year.

Operating expenses. Operating expenses declined to $16.9 million in 1998
from $24.5 million in 1997 primarily as a result of reduced salaries and
benefits, lower asset level expenses and reduced amortization expense.

Salaries and benefits declined in 1998 as a result of the consolidation of
some of the servicing offices (Portfolios being serviced in the closed offices
reached final resolution).

Interest on other notes payable declined by $2.0 million in 1998 due to
lower outstanding average balances of portfolio debt.

Asset level expenses incurred in connection with the servicing of Portfolio
Assets decreased in 1998 as a result of lower investments in Portfolio Assets in
1998. Occupancy and other expenses decreased as a result of the consolidation of
servicing offices in 1998.

Consumer Lending

Gain on sale of automobile loans. The Company realized gains of $7.2
million on the sale of approximately $172 million of automobile loans in 1998.
During 1997, the Company completed one securitization sale of loans totaling $35
million; however, no gain was recognized due to the poor performance history
associated with the original automobile finance program.

Interest and other income. Interest income was relatively flat year to
year. Servicing fees increased $2.2 million due to increased revenue from
securitization trusts.

Interest expense. Interest expense was relatively flat year to year.

Operating expenses. Salaries and benefits increased by 89% to $5.6 million
in 1998 from $3.0 million in 1997 as a result of the increased levels of
operating activity in 1998. Other expenses increased $2.5 million due to the
growth in the origination and servicing operations.

Provision for loan losses and residual interests. The provision for loan
losses on automobile receivables and impairment of residual interests increased
to $9.2 million from $6.6 million in 1997. The provision for impairment on
residual interests totaled $4.5 million while the provision for loan losses
totaled $4.7 million in 1998. This provision is primarily a result of Consumer
Corp.'s review and increase of the underlying loss assumptions from a range of
13-14% to 16-18% based upon actual performance of the securitized assets and
anticipated losses on the loans originated under the discontinued initial
venture into the sub-prime automobile market.
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<PAGE> 30

Other Items Affecting Net Earnings.

The following items affect the Company's overall results of operations and
are not directly related to any one of the Company's businesses discussed above.

Corporate interest expense. Interest income on the Class A Certificate
during 1997 represents reimbursement to the Company from the Trust of dividends
through June 30, 1997, of $3.6 million on special preferred stock and interest
paid under a June 1997 agreement to retire the Class A Certificate. Company
level interest expense increased to $3.8 million in 1998 from $1.1 million in
1997 as a result of higher volumes of debt associated with the equity required
to purchase Portfolio Assets, equity interests in Acquisition Partnerships and
capital support to operating subsidiaries.

Corporate overhead. Salaries and benefits, occupancy and professional fees
account for the majority of other overhead expenses, which increased in 1998
compared to 1997, as a result of increased levels of borrowings during the year
and professional fees.

Income taxes. Federal income taxes are provided at a 35% rate applied to
taxable income and are offset by NOLs that the Company believes are available.
The tax benefit of the NOLs is recorded in the period during which the benefit
is realized. The Company reported a deferred tax benefit from NOLs of $1.2
million in 1998 as compared to a benefit of $13.6 million in 1997.

LIQUIDITY AND CAPITAL RESOURCES

Generally, the Company requires liquidity to fund its operations, working
capital, payment of debt, equity for acquisition of Portfolio Assets,
investments in and advances to the Acquisition Partnerships, investments in
expanding businesses to support their growth, retirement of and dividends on
preferred stock, and other investments by the Company. The potential sources of
liquidity are funds generated from operations, equity distributions from the
Acquisition Partnerships, interest and principal payments on subordinated
intercompany debt and dividends from the Company's subsidiaries, short-term
borrowings from revolving lines of credit, proceeds from equity market
transactions, securitization and other structured finance transactions and other
special purpose short-term borrowings.

During the fourth quarter of 1999, FirstCity completed several transactions
that enhance the Company's liquidity position through additional funding. The
transactions were structured to provide the immediate funding needs of
FirstCity's remaining business units while containing incentives for the Company
to replace the borrowings with other sources of funding over time.

The Company renewed and restructured its senior lending facility (the
"Senior Facility"). The Senior Facility was renewed at a maximum available
amount of $88 million. The restructured Senior Facility matures June 2001 and
carries pricing of Libor plus 4% on the outstanding indebtedness thereunder. The
Senior Facility provides for a facility fee of $1.65 million if the loan is paid
in full before September 30, 2000, or $2.5 million if paid thereafter. Defaults
at Harbor Financial Group, Inc. and its subsidiaries do not constitute defaults
under the Senior Facility. The Senior Facility also requires the consent of the
lenders prior to payment of any common and preferred dividends. The Company
continually evaluates its liquidity position giving priority to assuring
adequate funding levels for its two operating entities. Secondarily, management
will determine when and if it is appropriate to pay the dividends on the
Company's outstanding preferred stock. Currently, there are approximately 1.2
million preferred shares outstanding with accrued dividends of approximately
$1.3 million.

During 1999, the Company issued $25 million in senior subordinated notes
maturing in December 2003. The notes bear interest at prime plus 3.75% in the
first year and provide for an increase of 1/2% in the rate each year thereafter.
The redemption price for the notes is equal to the principal amount of the notes
plus any accrued interest through December 31, 1999. The redemption price
increases by 1% of the principal amount on January 1, 2000 and each January 1
thereafter. In conjunction with this financing, the Company issued a warrant for
the purchase of 425,000 shares of the Company's common stock at $2.3125 per
share (the closing price on December 21, 1999). The estimated fair value of such
warrant of $875,000, was allocated to shareholders' equity with an offsetting
discount reflected on the debt. Such discount will be amortized over the
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<PAGE> 31

life of the debt. The obligation to issue a warrant for 250,000 shares of the
Company's common stock to the revolving lender was cancelled in conjunction with
this financing and the restructuring of the Senior Facility. The Company also
issued an option to the note holder allowing it to acquire an additional warrant
for 1,975,000 shares of non-voting common stock in the Company (currently no
such stock is authorized), which can be exercised after one year if the notes or
any portion thereof remains outstanding, but not prior thereto. The strike price
on these warrants is $2.3125. In the event that the notes are paid prior to the
expiration of such one-year period through a transaction involving the issuance
of warrants, the note holder is entitled to retain sufficient warrants to allow
the note holder to acquire approximately 4.86% of the Company's common stock.
The Company has until May 15, 2000 to take the necessary actions to authorize
the issuance of the non-voting common stock covered by the option.

FirstCity Funding, L.P., the Company's automobile finance business unit,
completed securitizations of $56 million and $100 million of face value of
automobile receivables in 1999. The first transaction was structured with $48.9
million in senior bonds and the balance held by the Company in a residual
interest. The second transaction was structured with $73.7 million in senior
bonds, $9.3 million in junior bonds and the balance held by the Company in a
residual interest. Additionally, the credit enhancement provider for the
automobile warehouse facility has reestablished funding to a maximum available
funding amount of $70 million ($50 million at December 31, 1999 with an
additional $20 million available subsequent to year end) and has been extended
through June of 2000. The Company continues to work with the credit enhancement
provider on its automobile securitizations to continue extensions of the waivers
and consents of trigger events occurring from the Company's failure to meet
certain financial covenants resulting from losses in the Company's discontinued
mortgage operations.

Although the above transactions enhanced the Company's immediate liquidity
concerns, management has identified the following areas that it believes are
essential to allow the Company to meet all of its financing needs and cover its
obligations during 2000:

- the ability to continue to obtain warehouse financing for consumer
lending operations and identify alternative sources for such funding;

- identify alternative or additional sources of financing on residual
interests obtained from securitization transactions;

- the ability to continue to securitize automobile finance receivables,
either with or without credit enhancement;

- the ability to obtain additional financing required by Commercial Corp.
for investment in additional Portfolio Assets; and

- realize positive cash flows from existing equity investments in Portfolio
Assets

The Company has received an extension on its automobile finance warehouse
line through June 28, 2000, and is currently in discussions with various
warehouse lenders regarding the potential to structure alternative or additional
funding. Alternatives currently being explored include a whole loan sale
arrangement and an uninsured warehouse line.

During January 2000, the Company increased its existing residual financing
from $4 million at December 31, 1999 to $7 million. Residual interests securing
this borrowing had a carrying value of $40.6 million at December 31, 1999.
Although there is no guarantee, the Company anticipates additional borrowings
against such residuals will be available in the future.

During the first quarter of 2000, the Company completed an automobile
finance receivable securitization containing loans of approximately $41 million
at the end of March 2000. The ability of the Company to continue to securitize
is dependant on numerous factors including, but not limited to, conditions in
the securities market in general and conditions in the asset-backed
securitization market. The Company does not anticipate a significant down-turn
in market conditions that would have a significant adverse impact on the
Company's ability to securitize its loans.

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<PAGE> 32

The Company anticipates closing a secured, $17 million equity acquisition
facility for the investment in future Acquisition Partnerships. This, along with
equity distributions (totaling approximately $1.6 million for the first quarter
of 2000) from existing Acquisition Partnerships, is adequate to meet the funding
needs of Commercial Corp.

As an additional source of liquidity, the Company can sell portfolio
assets, loans or portions of operating businesses.

Based on the above, management of the Company expects that it will be able
to meet its obligations as they come due during 2000.

The Company and each of its major operating subsidiaries have entered into
one or more credit facilities to finance its respective operations. Each of the
operating subsidiary credit facilities is nonrecourse to the Company and the
other operating subsidiaries, except as discussed below.

The Company and its subsidiaries had credit facilities providing for
borrowings in an aggregate principal amount of $248 million (including the
proposed $17 million equity acquisition facility) and outstanding borrowings of
$170 million. The following table summarizes the material terms of the credit
facilities to which the Company, its major operating subsidiaries and the
Acquisition Partnerships were parties to as of April 5, 2000 and the outstanding
borrowings under such facilities as of December 31, 1999.

CREDIT FACILITIES

<TABLE>
<CAPTION>
OUTSTANDING
BORROWINGS
AS OF
PRINCIPAL DECEMBER 31,
AMOUNT 1999 INTEREST RATE OTHER TERMS AND CONDITIONS
--------- ------------ ------------- --------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
FIRSTCITY
Company Senior Facility..... $ 88 $ 77 Libor + 4% Secured by the assets of the
Company, expires June 30,
2001
Company senior subordinated
term debt................. 25 25 Prime + 3.75% Secured by the assets of the
Company, expires December
20, 2003
Term fixed asset
facilities................ -- 1 Prime + 1.0% Secured by certain fixed
assets, repaid February 2000
Term credit facilities...... 8 10 LIBOR + 5.0% Secured by stock of an
Fixed at acquisition partnership and
7.25% certain residual interests,
expires April 15, 2000 and
January 3, 2001
COMMERCIAL CORP.
Term facility............... 7 7 LIBOR + 4.0% Term facility secured by
existing Portfolio Assets,
expires April 30, 2000
Term acquisition
facilities................ 24 24 Fixed at Acquisition facilities for
7.00% existing Portfolio Assets.
to 7.66% Secured by Portfolio Assets.
Expires June 5, 2002 and
November 7, 2002
</TABLE>

30
<PAGE> 33

<TABLE>
<CAPTION>
OUTSTANDING
BORROWINGS
AS OF
PRINCIPAL DECEMBER 31,
AMOUNT 1999 INTEREST RATE OTHER TERMS AND CONDITIONS
--------- ------------ ------------- --------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Equity acquisition
facility.................. 17 -- LIBOR + 4.5% Acquisition facility for the
investment in future
acquisition partnerships,
anticipated to close April,
2000. Expires March 31, 2001
CONSUMER CORP.
Warehouse facility.......... 70 20 Rate based on Commercial paper conduit
commercial warehouse facility secured
paper rates by automobile receivables,
combined with expires June 28, 2000
certain
facility fees
Term facility............... 7 4 Prime + 1% Term facility secured by
residual interests in
automobile securitized
loans, expires May 3, 2000
Term fixed asset
facilities................ 2 2 Fixed at Secured by certain fixed
9.33% assets,
---- ----
to 9.50% expires July 31, 2002 and
2003
Total............. $248 $170
==== ====
Unconsolidated Acquisition
Partnerships Term
acquisition facilities.... $181 $181
-------- ---------
-------- --------- Fixed at 8.5% Senior and subordinated
to 13%, loans secured by Portfolio
LIBOR + 2% to Assets, various maturities
4% and
Prime + 1%
</TABLE>

FirstCity. The Company Credit Facility is a $88 million revolving credit
facility secured by substantially all the assets of the Company, including a
pledge of the stock of substantially all of its operating subsidiaries and its
equity interests in the Acquisition Partnerships. At December 31, 1999, the
amount outstanding under the facility totaled approximately $77 million. The
Company Credit Facility matures on June 30, 2001.

Commercial Corp. Commercial Corp. funds its activities with equity
investments and subordinated debt from the Company and nonrecourse financing
provided by a variety of bank and institutional lenders, primarily Cargill
Financial. Such lenders provide funds to the special purpose entities formed for
the purpose of acquiring Portfolio Assets or to Acquisition Partnerships formed
for the purpose of co-investing in asset pools with other investors, principally
Cargill Financial.

Consumer Corp. Consumer Corp. conducts most of its activities through
Funding and funds its activities with equity investments and subordinated debt
from the Company and a limited recourse $70 million warehouse credit facility
with Bank of America. Funds are advanced under the facility in accordance with
an eligible loan borrowing base. Loans are eligible for inclusion in the
borrowing base if they meet documented underwriting standards as approved by
Bank of America and are not delinquent beyond terms established in the loan
agreement. Under the terms of the credit facility, the Company guarantees 25% of
the amount outstanding under the facility from time to time in addition to an
undertaking by the Company to support the liquidity requirements required in
securitization transactions.

The borrowing facilities for the Company, Commercial Corp. and Consumer
Corp. each include key personnel provisions. These provisions generally provide
that if certain key personnel are no longer employed and suitable replacements
are not found within a defined time limit, such facilities become due and
payable.

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<PAGE> 34

FOURTH QUARTER

Net earnings for the fourth quarter of 1999 were $1.2 million. After
deducting preferred dividends, net earnings attributable to common equity were
$.5 million, or $0.06 per basic and diluted share. Net earnings for the fourth
quarter of 1998 were $4.9 million, including a $.3 million deferred tax benefit.
After deducting preferred dividends, net earnings attributable to common equity
were $4.2 million in 1998, or $.51 per basic and diluted share ($0.38 from
continuing operations). The following table presents a summary of operations for
the fourth quarters of 1999 and 1998.

CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS

<TABLE>
<CAPTION>
FOURTH QUARTER
-----------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues.................................................... $18,466 $15,907
Expenses.................................................... 17,061 11,617
Earnings from continuing operations......................... 1,154 3,829
Earnings from discontinued operations....................... -- 1,059
------- -------
Net earnings................................................ 1,154 4,888
------- -------
Preferred dividends......................................... 642 642
------- -------
Net earnings to common shareholders......................... $ 512 $ 4,246
======= =======
Net earnings from continuing operations per common share --
basic and diluted......................................... $ 0.06 $ 0.38
</TABLE>

EFFECT OF NEW ACCOUNTING STANDARDS

Statement of Financial Accounting Standards ("SFAS No. 133"), "Accounting
for Derivative Instruments and for Hedging Activities," requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133
requires that changes in fair value of a derivative be recognized currently in
earnings unless specific hedge accounting criteria are met. Upon implementation
of SFAS 133, hedging relationships may be redesignated and securities held to
maturity may be transferred to available for sale or trading. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," deferred the effective date of SFAS
No. 133 to fiscal years beginning after June 15, 2000. The Company will adopt
SFAS No. 133 on January 1, 2001 and is evaluating the impact, if any, this
statement may have on its future Consolidated Financial Statements.

RISK FACTORS

RISKS ASSOCIATED WITH RAPID GROWTH AND ENTRY INTO NEW BUSINESSES

Following the Merger in 1995, the Company embarked upon a strategic
diversification of its business. Previously, the Company had been engaged
primarily in the Portfolio Asset acquisition and resolution business. During
1997, the Company entered the residential and commercial mortgage banking
business and the consumer lending business in 1996, through a combination of
acquisitions and the start-up of new business ventures. As previously discussed,
during 1999, the Company adopted formal plans to discontinue its mortgage
banking operations, which had a significant adverse impact on the Company's
results of operations.

The entry of the Company into these new businesses has resulted in
increased demands on the Company's personnel and systems. The development and
integration of the new businesses requires the investment of additional capital
and the continuous involvement of senior management. The Company also must
manage a variety of businesses with differing markets, customer bases, financial
products, systems and managements. An inability to develop, integrate and manage
its businesses could have a material adverse

32
<PAGE> 35

effect on the Company's financial condition, results of operations and business
prospects. The Company's ability to support and manage continued growth is
dependent upon, among other things, its ability to attract and retain senior
management for each of its businesses, to hire, train, and manage its workforce
and to continue to develop the skills necessary for the Company to compete
successfully in its existing and new business lines. There can be no assurance
that the Company will successfully meet all of these challenges.

RISKS ASSOCIATED WITH DISCONTINUED OPERATIONS

During the third quarter of 1999, management of the Company adopted formal
plans to discontinue the operations of Mortgage Corp. and Capital Corp.
Potential liability of the Company could arise in regard to the bankruptcy
filing of Mortgage Corp. The risk that the value of Capital Corp's. retained
interests in the securitizations could be adversely affected by the level and
fluctuation of interest rates, resulting in a lower realizable value. The above
items could have a material adverse impact on the formal plans of termination
and the future earnings of the Company.

CONTINUING NEED FOR FINANCING

General. The successful execution of the Company's business strategy
depends on its continued access to financing for each of its major operating
subsidiaries. In addition to the need for such financing, the Company must have
access to liquidity to invest as equity or subordinated debt to meet the capital
needs of its subsidiaries. Liquidity is generated by the cash flow to the
Company from subsidiaries, access to the public debt and equity markets and
borrowings incurred by the Company. The Company's access to the capital markets
is affected by such factors as changes in interest rates, general economic
conditions, and the perception in the capital markets of the Company's business,
results of operations, leverage, financial condition and business prospects. In
addition, the Company's ability to issue and sell common equity (including
securities convertible into, or exercisable or exchangeable for, common equity)
is limited as a result of the tax laws relating to the preservation of the NOLs
available to the Company as a result of the Merger. There can be no assurance
that the Company's funding relationships with commercial banks, investment banks
and financial services companies (including Cargill Financial) that have
previously provided financing for the Company and its subsidiaries will continue
past their respective current maturity dates. The majority of the credit
facilities to which the Company and its subsidiaries are parties have short-term
maturities. Negotiations are underway to extend certain of such credit
facilities that are approaching maturity and the Company expects that it will be
necessary to extend the maturities of other such credit facilities in the near
future. There can be no assurance that such negotiations will be successful. If
such negotiations do not result in the extension of the maturities of such
credit facilities and the Company or its subsidiaries cannot find alternative
funding sources on satisfactory terms, or at all, the Company's financial
condition, results of operations and business prospects would be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

Each of the Company and its major operating subsidiaries has its own source
of debt financing. In certain circumstances, a default by the Company or any of
its major operating subsidiaries in respect of indebtedness owed to a third
party constitutes a default under the Company Credit Facility. The credit
facilities to which the Company's major operating subsidiaries are party do not
contain similar cross-default or cross-acceleration provisions. Although the
Company intends to continue to segregate the debt obligations of each such
subsidiary, there can be no assurance that its existing financing sources will
continue to agree to such arrangements or that alternative financing sources
that would accept such arrangements would be available. In the event the
Company's major operating subsidiaries are compelled to accept cross-guarantees,
or cross-default or cross-acceleration provisions in connection with their
respective credit facilities, financial difficulties experienced by one of the
Company's subsidiaries could adversely impact the Company's other subsidiaries.

Dependence on Warehouse Financing. As is customary in the consumer lending
businesses, the Company's subsidiaries depend upon warehouse credit facilities
with financial institutions or institutional lenders to finance the origination
and purchase of loans on a short-term basis pending sale or securitization.
Implementation of the Company's business strategy requires the continued
availability of warehouse credit facilities, and may require increases in the
permitted borrowing levels under such facilities. There can be no
33
<PAGE> 36

assurance that such financing will be available on terms satisfactory to the
Company. The inability of the Company to arrange additional warehouse credit
facilities, to extend or replace existing facilities when they expire or to
increase the capacity of such facilities may have a material adverse effect on
the Company's financial condition, results of operations and business prospects.

RISKS OF SECURITIZATION

Significance of Securitization. The Company believes that it will become
increasingly dependent upon its ability to securitize sub-prime automobile loans
and other loans to efficiently finance the volume of assets expected to be
generated. Accordingly, adverse changes in the secondary market for such loans
could impair the Company's ability to originate, purchase and sell loans on a
favorable or timely basis. Any such impairment could have a material adverse
effect upon the Company's financial condition, results of operations and
business prospects. Proceeds from the securitization of originated and acquired
loans are required to be used to repay borrowings under warehouse credit
facilities, thereby making such facilities available to finance the origination
and purchase of additional loan assets. There can be no assurance that, as the
Company's volume of loans originated or purchased increases and other new
products available for securitization increases, the Company will be able to
securitize its loan production efficiently. An inability to efficiently
securitize its loan production could have a material adverse effect on the
Company's financial condition, results of operations and business prospects.

Securitization transactions may be affected by a number of factors, some of
which are beyond the Company's control, including, among other things, the
adverse financial condition of, or developments related to, some of the
Company's competitors, conditions in the securities markets in general, and
conditions in the asset-backed securitization market. The Company's
securitizations typically utilize credit enhancements in the form of financial
guaranty insurance policies in order to achieve enhanced credit ratings. Failure
to obtain insurance company credit enhancement could adversely affect the timing
of or ability of the Company to effect securitizations. In addition, the failure
to satisfy rating agency requirements with respect to loan pools would adversely
impact the Company's ability to effect securitizations.

Contingent Risks. Although the Company intends to sell substantially all of
the sub-prime automobile loans and other consumer loans that it originates or
purchases, the Company retains some degree of credit risk on substantially all
loans sold. During the period in which loans are held pending sale, the Company
is subject to various business risks associated with the lending business,
including the risk of borrower default, the risk of foreclosure and the risk
that a rapid increase in interest rates would result in a decline in the value
of loans to potential purchasers. The Company expects that the terms of its
securitizations will require it to establish deposit accounts or build
over-collateralization levels through retention of distributions otherwise
payable to the holders of subordinated interests in the securitization. The
Company also expects to be required to commit to repurchase or replace loans
that do not conform to the representations and warranties made by the Company at
the time of sale.

Retained Risks of Securitized Loans. The Company makes various
representations with respect to the loans that it securitizes. With respect to
acquired loans, the Company's representations rely in part on similar
representations made by the originators of such loans when they were purchased
by the Company. In the event of a breach of its representations, the Company may
be required to repurchase or replace the related loan using its own funds. While
the Company may have a claim against the originator in the event of a breach of
any of these representations made by the originators, the Company's ability to
recover on any such claim will be dependent on the financial condition of the
originator. There can be no assurance that the Company will not experience a
material loss associated with any of these contingencies.

Performance Assumptions. Funding's future net income will be highly
dependent on realizing securitization gains on the sale of loans. Such gains
will be dependent largely upon the estimated present values of the subordinated
interests expected to be derived from the transactions and retained by the
Company. Management makes a number of assumptions in determining the estimated
present values for the subordinated interests. These assumptions include, but
are not limited to, prepayment speeds, default rates and subsequent losses on
the underlying loans, and the discount rates used to present value the future
cash flows. All of the

34
<PAGE> 37

assumptions are subjective. Varying the assumptions can have a material effect
on the present value determination in one securitization as compared to any
other. Subsequent events will cause the actual occurrences of prepayments,
losses and interest rates to be different from the assumptions used for such
factors at the time of the recognition of the sale of the loans. The effect of
the subsequently occurring events could cause a re-evaluation of the carrying
values of the previously estimated values of the subordinated interests and
excess spreads and such adjustment could be material.

Because the subordinated interests to be retained by Funding represent
claims to future cash flow that are subordinated to holders of senior interests,
Funding retains a significant portion of the risk of whether the full value of
the underlying loans may be realized. In addition, holders of the senior
interests may have the right to receive certain additional payments on account
of principal in order to reduce the balance of the senior interests in
proportion to the credit enhancement requirements of any particular transaction.
Such payments for the benefit of the senior interest holders will delay the
payment, if any, of excess cash flow to Funding as the holder of the
subordinated interests.

IMPACT OF CHANGING INTEREST RATES

Because most of the Company's borrowings are at variable rates of interest,
the Company will be impacted by fluctuations in interest rates. However, certain
effects of changes in interest rates, such as increased prepayments of
outstanding loans, cannot be mitigated. Fluctuations in interest rates could
have a material adverse effect on the Company's consolidated financial
condition, results of operations and business prospects.

A substantial and sustained decline in interest rates may adversely impact
the amount of distressed assets available for purchase by Commercial Corp. The
value of the Company's interest-earning assets and liabilities may be directly
affected by the level of and fluctuations in interest rates, including the
valuation of any residual interests in securitizations that would be severely
impacted by increased loan prepayments resulting from declining interest rates.

Conversely, a substantial and sustained increase in interest rates could
adversely affect the ability of the Company to originate loans and could reduce
the gains recognized by the Company upon their securitization and sale.
Fluctuating interest rates also may affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on loans
held pending sale and the interest paid by the Company for funds borrowed under
the Company's warehouse credit facilities or otherwise.

CREDIT IMPAIRED BORROWERS

The Company's sub-prime borrowers generally are unable to obtain credit
from traditional financial institutions due to factors such as an impaired or
poor credit history, low income or another adverse credit event. The Company is
subject to various risks associated with these borrowers, including, but not
limited to, the risk that the borrowers will not satisfy their debt service
obligations and that the realizable value of the assets securing their loans
will not be sufficient to repay the borrowers' debt. While the Company believes
that the underwriting criteria and collection methods it employs enable it to
identify and control the higher risks inherent in loans made to such borrowers,
and that the interest rates charged compensate the Company for the risks
inherent in such loans, no assurance can be given that such criteria or methods,
or such interest rates, will afford adequate protection against, or compensation
for, higher than anticipated delinquencies, foreclosures or losses. The actual
rate of delinquencies, foreclosures or losses could be significantly accelerated
by an economic downturn or recession. Consequently, the Company's consolidated
financial condition, results of operations and business prospects could be
materially adversely affected. The Company has established an allowance for loan
losses through periodic earnings charges and purchase discounts on acquired
receivables to cover anticipated loan losses on the loans currently in its
portfolio. No assurance can be given, however, that loan losses in excess of the
allowance will not occur in the future or that additional provisions will not be
required to provide for adequate allowances in the future.

35
<PAGE> 38

AVAILABILITY OF PORTFOLIO ASSETS

The Portfolio Asset acquisition and resolution business is affected by
long-term cycles in the general economy. In addition, the volume of domestic
Portfolio Assets available for purchase by investors such as the Company has
generally declined since 1993 as large pools of distressed assets acquired by
governmental agencies in the 1980s and early 1990s have been resolved or sold.
The Company cannot predict its future annual acquisition volume of Portfolio
Assets. Moreover, future Portfolio Asset purchases will depend on the
availability of Portfolios offered for sale, the availability of capital and the
Company's ability to submit successful bids to purchase Portfolio Assets. The
acquisition of Portfolio Assets has become highly competitive in the United
States. This may require the Company to acquire Portfolio Assets at higher
prices thereby lowering profit margins on the resolution of such Portfolios.
Under certain circumstances, the Company may choose not to bid for Portfolio
Assets that it believes cannot be acquired at attractive prices. As a result of
all the above factors, Portfolio Asset purchases, and the revenue derived from
the resolution of Portfolio Assets, may vary significantly from quarter to
quarter.

AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS

The Company believes that, as a result of the Merger, approximately $596
million of NOLs were available to the Company to offset future taxable income as
of December 31, 1995. Since December 31, 1995, the Company has generated an
additional $105 million in tax operating losses. Accordingly, as of December 31,
1999, the Company believes that it has approximately $701 million of NOLs
available to offset future taxable income. In accordance with the terms of
Financial Accounting Standards Board Statement Number 109 (relating to
accounting for income taxes), the Company has established a future utilization
valuation allowance equivalent to approximately $77.4 million of the total $701
million of NOLs, which equates to a $27.1 million deferred tax asset on the
Company's books and records. However, because the Company's position in respect
of its $596 million NOLs resulting from the Merger is based upon factual
determinations and upon legal issues with respect to which there is uncertainty
and because no ruling has been obtained from the Internal Revenue Service (the
"IRS") regarding the availability of the NOLs to the Company, there can be no
assurance that the IRS will not challenge the availability of such NOLs and, if
challenged, that the IRS will not be successful in disallowing this portion of
the Company's NOLs, with the result that the Company's $27.1 million deferred
tax asset would be reduced or eliminated.

Assuming that the $701 million in NOLs is available to the Company, the
entire amount of such NOLs may be carried forward to offset future taxable
income of the Company until the tax year 2005. Thereafter, the NOLs begin to
expire. The ability of the Company to utilize such NOLs will be severely limited
if there is a more than 50% ownership change of the Company during a three-year
testing period within the meaning of section 382 of the Internal Revenue Code of
1986, as amended (the "Tax Code").

If the Company were unable to utilize its NOLs to offset future taxable
income, it would lose significant competitive advantages that it now enjoys.
Such advantages include, but are not limited to, the Company's ability to offset
non-cash income recognized by the Company in connection with certain
securitizations, to generate capital to support its expansion plans on a
tax-advantaged basis, to offset its and its consolidated subsidiaries' pretax
income, and to have access to the cash flow that would otherwise be represented
by payments of federal tax liabilities.

ASSUMPTIONS REGARDING RECOGNITION OF DEFERRED TAX ASSET

As noted above, the Company has net operating loss carryforwards for
federal income tax purposes available to offset future federal taxable income,
if any, through the year 2019. A valuation allowance is provided to reduce the
deferred tax assets to a level which, more likely than not, will be realized.
The ultimate realization of the resulting net deferred tax asset is dependent
upon generating sufficient taxable income prior to expiration of the net
operating loss carryforwards. Although realization is not assured, management
believes it is more likely than not that all of the recorded deferred tax asset,
net of the allowance, will be realized. The amount of the deferred tax asset
considered realizable, however, could be adjusted in the future if estimates of
future taxable income during the carryforward period change. The change in
valuation allowance represents a

36
<PAGE> 39

change in the estimate of the future taxable income during the carryforward
period since the prior year end and utilization of net operating loss
carryforwards since the Merger. The ability of the Company to realize the
deferred tax asset is periodically reviewed and the valuation allowance is
adjusted accordingly.

ASSUMPTIONS UNDERLYING PORTFOLIO ASSET PERFORMANCE

The purchase price and carrying value of Portfolio Assets acquired by
Commercial Corp. are determined largely by estimating expected future cash flows
from such assets. Commercial Corp. develops and revises such estimates based on
its historical experience and current market conditions, and based on the
discount rates that the Company believes are appropriate for the assets
comprising the Portfolios. In addition, many obligors on Portfolio Assets have
impaired credit, with risks associated with such obligors similar to the risks
described in respect of borrowers under "-- Credit Impaired Borrowers." If the
amount and timing of actual cash flows is materially different from estimates,
the Company's consolidated financial condition, results of operations and
business prospects could be materially adversely affected.

GENERAL ECONOMIC CONDITIONS

Periods of economic slowdown or recession, or declining demand for
commercial real estate, automobile loans or other commercial or consumer loans
may adversely affect the Company's business. Economic downturns may reduce the
number of loan originations by the Company's consumer and commercial finance
businesses and negatively impact its securitization activity and generally
reduce the value of the Company's assets. In addition, periods of economic
slowdown or recession, whether general, regional or industry-related, may
increase the risk of default on loans and could have a material adverse effect
on the Company's consolidated financial condition, results of operations and
business prospects. Such periods also may be accompanied by declining values of
automobiles and other property securing outstanding loans, thereby weakening
collateral coverage and increasing the possibility of losses in the event of
default. Significant increases in automobiles for sale during recessionary
economic periods may depress the prices at which such collateral may be sold or
delay the timing of such sales. There can be no assurance that there will be
adequate markets for the sale of repossessed automobiles. Any material
deterioration of such markets could reduce recoveries from the sale of
collateral.

Such economic conditions could also adversely affect the resolution of
Portfolio Assets, lead to a decline in prices or demand for collateral
underlying Portfolio Assets, or increase the cost of capital invested by the
Company and the length of time that capital is invested in a particular
Portfolio. All or any one of these events could decrease the rate of return and
profits to be realized from such Portfolio and materially adversely affect the
Company's consolidated financial condition, results of operations and business
prospects.

RISK OF DECLINING VALUE OF COLLATERAL

The value of the collateral securing automobile and other consumer loans
and loans acquired for resolution, as well as real estate or other acquired
distressed assets, is subject to various risks, including uninsured damage,
change in location or decline in value caused by use, age or market conditions.
Any material decline in the value of such collateral could adversely affect the
consolidated financial condition, results of operations and business prospects
of the Company.

GOVERNMENT REGULATION

Many aspects of the Company's business are subject to regulation,
examination and licensing under various federal, state and local statutes and
regulations that impose requirements and restrictions affecting, among other
things, the Company's loan originations, credit activities, maximum interest
rates, finance and other charges, disclosures to customers, the terms of secured
transactions, collection, repossession and claims handling procedures, multiple
qualification and licensing requirements for doing business in various
jurisdictions, and other trade practices. The Company believes it is currently
in compliance in all material respects with applicable regulations, but there
can be no assurance that the Company will be able to maintain such compliance.
Failure to comply with, or changes in, these laws or regulations, or the
expansion of the

37
<PAGE> 40

Company's business into jurisdictions that have adopted more stringent
regulatory requirements than those in which the Company currently conducts
business, could have an adverse effect on the Company by, among other things,
limiting the interest and fee income the Company may generate on existing and
additional loans, limiting the states in which the Company may operate or
restricting the Company's ability to realize on the collateral securing its
loans. See "Business -- Government Regulation."

ENVIRONMENTAL LIABILITIES

The Company, through its subsidiaries and affiliates, acquires real
property in its Portfolio Asset acquisition and resolution business. There is a
risk that properties acquired by the Company could contain hazardous substances
or waste, contaminants or pollutants. The Company may be required to remove such
substances from the affected properties at its expense, and the cost of such
removal may substantially exceed the value of the affected properties or the
loans secured by such properties. Furthermore, the Company may not have adequate
remedies against the prior owners or other responsible parties to recover its
costs, either as a matter of law or regulation, or as a result of such prior
owners' financial inability to pay such costs. The Company may find it difficult
or impossible to sell the affected properties either prior to or following any
such removal.

COMPETITION

All of the businesses in which the Company operates are highly competitive.
Some of the Company's principal competitors are substantially larger and better
capitalized than the Company. Because of their resources, these companies may be
better able than the Company to obtain new customers for loan production, to
acquire Portfolio Assets, to pursue new business opportunities or to survive
periods of industry consolidation. Access to and the cost of capital are
critical to the Company's ability to compete. Many of the Company's competitors
have superior access to capital sources and can arrange or obtain lower cost of
capital, resulting in a competitive disadvantage to the Company with respect to
such competitors.

In addition, certain of the Company's competitors may have higher risk
tolerances or different risk assessments, which could allow these competitors to
establish lower margin requirements and pricing levels than those established by
the Company. In the event a significant number of competitors establish pricing
levels below those established by the Company, the Company's ability to compete
would be adversely affected.

RISK ASSOCIATED WITH FOREIGN OPERATIONS

Commercial Corp. has acquired, and manages and resolves, Portfolio Assets
located in France and Mexico and is actively pursuing opportunities to purchase
additional pools of distressed assets in these locations as well as other areas
of Western Europe and Southeast Asia. Foreign operations are subject to various
special risks, including currency translation risks, currency exchange rate
fluctuations, exchange controls and different political, social and legal
environments within such foreign markets. To the extent future financing in
foreign currencies is unavailable at reasonable rates, the Company would be
further exposed to currency translation risks, currency exchange rate
fluctuations and exchange controls. In addition, earnings of foreign operations
may be subject to foreign income taxes that reduce cash flow available to meet
debt service requirements and other obligations of the Company, which may be
payable even if the Company has no earnings on a consolidated basis. Any or all
of the foregoing could have a material adverse effect on the Company's financial
condition, results of operations and business prospects.

DEPENDENCE ON AUTOMOBILE DEALERSHIP RELATIONSHIPS

The ability of the Company to expand into new geographic markets and to
maintain or increase its volume of automobile loans is dependent upon
maintaining and expanding the network of franchised automobile dealerships from
which it purchases contracts. Increased competition, including competition from
captive finance affiliates of automobile manufacturers, could have a material
adverse effect on the Company's ability to maintain or expand its dealership
network.

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<PAGE> 41

LITIGATION

Industry participants in the consumer lending businesses from time to time
are named as defendants in litigation involving alleged violations of federal
and state consumer protection or other similar laws and regulations. A judgment
against the Company in connection with any such litigation could have a material
adverse effect on the Company's consolidated financial condition, results of
operations and business prospects.

RELATIONSHIP WITH AND DEPENDENCE UPON CARGILL

The Company's relationship with Cargill Financial is significant in a
number of respects. Cargill Financial, a subsidiary of Cargill, Incorporated, a
privately held, multi-national agricultural and financial services company,
provides equity and debt financings for many of the Acquisition Partnerships.
Cargill Financial owns approximately 2.7% of the Company's outstanding Common
Stock, and a Cargill Financial designee, David W. MacLennan, serves as a
director of the Company. The Company believes its relationship with Cargill
Financial significantly enhances the Company's credibility as a purchaser of
Portfolio Assets and facilitates its ability to expand into other businesses and
foreign markets. Although management believes that the Company's relationship
with Cargill Financial is excellent, there can be no assurance that such
relationship will continue in the future. Absent such relationship, the Company
and the Acquisition Partnerships would be required to find alternative sources
for the financing that Cargill Financial has historically provided. There can be
no assurance that such alternative financing would be available. Any termination
of such relationship could have a material adverse effect on the Company's
consolidated financial condition, results of operations and business prospects.

DEPENDENCE ON KEY PERSONNEL

The Company is dependent on the efforts of its senior executive officers,
particularly James R. Hawkins (Chairman and Chief Executive Officer) and James
T. Sartain (President and Chief Operating Officer). The Company is also
dependent on several of the key members of management of each of its operating
subsidiaries, many of whom were instrumental in developing and implementing the
business strategy for such subsidiaries. The inability or unwillingness of one
or more of these individuals to continue in his present role could have a
material adverse effect on the Company's financial condition, results of
operations and business prospects. Certain senior executive officers have
entered into an employment agreement with the Company. There can be no assurance
that any of the foregoing individuals will continue to serve in his current
capacity or for what time period such service might continue. The Company does
not maintain key person life insurance for any of its senior executive officers.

INFLUENCE OF CERTAIN SHAREHOLDERS

The directors and executive officers of the Company collectively
beneficially own 17.9% of the Common Stock. Although there are no agreements or
arrangements with respect to voting such Common Stock among such persons except
as described below, such persons, if acting together, may effectively be able to
control any vote of shareholders of the Company and thereby exert considerable
influence over the affairs of the Company. James R. Hawkins, the Chairman of the
Board and Chief Executive Officer of the Company, is the beneficial owner of
11.48% of the Common Stock. James T. Sartain, President and Chief Operating
Officer of the Company, and ATARA I, Ltd. ("ATARA"), an entity associated with
Rick R. Hagelstein, former Executive Vice President of the Company and former
Chief Executive Officer of Mortgage Corp. each beneficially owns 4.1% of the
outstanding Common Stock. In addition, Cargill Financial owns approximately 2.7%
of the Common Stock. Mr. Hawkins, Mr. Sartain, Cargill Financial and ATARA are
parties to a shareholder voting agreement (the "Shareholder Voting Agreement").
Under the Shareholder Voting Agreement, Mr. Hawkins, Mr. Sartain and ATARA are
required to vote their shares in favor of Cargill Financial's designee for
director of the Company, and Cargill Financial is required to vote its shares in
favor of one or more of the designees of Messrs. Hawkins and Sartain and ATARA.
There can be no assurance that the interests of management or the other entities
and individuals named above will be aligned with the Company's other
shareholders.

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<PAGE> 42

SHARES ELIGIBLE FOR FUTURE SALE

The utilization of the Company's $596 million in NOLs resulting from the
Merger may be limited or prohibited under the Tax Code in the event of certain
ownership changes. The Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") contains provisions
restricting the transfer of its securities that are designed to avoid the
possibility of such changes. Such restrictions may prevent certain holders of
common stock of the Company from transferring such stock even if such holders
are permitted to sell such stock without restriction under the Securities Act,
and may limit the Company's ability to sell common stock to certain existing
holders of common stock at an advantageous time or at a time when capital may be
required but unavailable from any other source.

ANTI-TAKEOVER CONSIDERATIONS

The Company's Certificate of Incorporation and by-laws contain a number of
provisions relating to corporate governance and the rights of shareholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect to the extent they are utilized to delay, defer or prevent a change of
control of the Company by deterring unsolicited tender offers or other
unilateral takeover proposals and compelling negotiations with the Company's
Board of Directors rather than non-negotiated takeover attempts even if such
events may be in the best interests of the Company's shareholders. The
Certificate of Incorporation also contains certain provisions restricting the
transfer of its securities that are designed to prevent ownership changes that
might limit or eliminate the ability of the Company to use its NOLs resulting
from the Merger.

PERIOD TO PERIOD VARIANCES

The Company Portfolio Assets and Acquisition Partnerships based proceeds
realized from the resolution of the Portfolio Assets, which proceeds have
historically varied significantly and likely will continue to vary significantly
from period to period. Consequently, the Company's period to period revenue and
net income have historically varied, and are likely to continue to vary,
correspondingly. Such variances, alone or with other factors, such as conditions
in the economy or the financial services industries or other developments
affecting the Company, may result in significant fluctuations in the reported
earnings of the Company and in the trading prices of the Company's securities,
particularly the Common Stock.

TAX, MONETARY AND FISCAL POLICY CHANGES

The Company originates and acquires financial assets, the value and income
potential of which are subject to influence by various state and federal tax,
monetary and fiscal policies in effect from time to time. The nature and
direction of such policies are entirely outside the control of the Company, and
the Company cannot predict the timing or effect of changes in such policies.
Changes in such policies could have a material adverse effect on the Company's
consolidated financial condition, results of operations and business prospects.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's earnings are materially impacted by net gains on
sales of loans and net interest margins. The level of gains from loan sales the
Company achieves is dependent on demand for the products originated. Net
interest margins are dependent on the Company to maintain the spread or interest
differential between the interest it charges the customer for loans and the
interest the Company is charged for the financing of those loans. The following
describes each component of interest bearing assets held by the Company and how
each could be effected by changes in interest rates.

Portfolio assets consist of investments in pools of non-homogenous assets
that predominantly consist of loan and real estate assets. Earnings from these
assets are based on the estimated future cash flows from such assets and
recorded when those cash flows occur. The underlying loans within these pools
bear both fixed and variable rates. Due to the non-performing nature and history
of these loans, changes in prevailing bench-mark rates (such as the prime rate
or LIBOR) generally have a nominal effect on the ultimate future cash flow to be
realized from the loan assets. Furthermore, these pools of assets are held for
sale, not for investment; therefore, the disposition strategy is to liquidate
these assets as quickly as possible.

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<PAGE> 43

The sub-prime loans the Company sells generally are included in asset
backed securities the investor or purchaser issues. These securities are priced
at spreads over the LIBOR or an equivalent term treasury security. These spreads
are determined by demand for the security. Demand is affected by the perception
of credit quality and prepayment risk associated with the loans the Company
originates and sells. Interest rates offered to customers also affect prices
paid for loans. These rates are determined by review of competitors rate
offerings to the public and current prices being paid to the Company for the
products. The Company does not hedge these price risks.

The Company's residual interests in securitizations represent the present
value of the excess cash flows the Company expects to receive over the life of
the underlying sub-prime automobile loans. The sub-prime automobile residual
interests are affected less by prepayment speeds due to the shorter term of the
underlying assets and the fact that the loans are fixed rate, generally at the
highest rate allowable by law.

Additionally the Company has various sources of financing which have been
previously described in the Liquidity and Capital Resources section of Item 7.
All of the financing arrangements listed in the table below have variable
interest rates which, in the event of rising rates, would negatively impact the
earnings of the Company due to higher levels of interest expense.

In summary, the Company would be negatively impacted by rising interest
rates and declining prices for its sub-prime loans. Rising interest rates would
negatively impact the value of residual interests in securitizations and costs
of borrowings. Declining prices for the Company's sub-prime loans would
adversely effect the levels of gains achieved upon the sale of those loans.

The following table is a summary of the interest earning assets and
interest bearing liabilities, as of December 31, 1999, segregated by asset type
as described in the previous paragraphs, with expected maturity or sales dates
as indicated (dollars in thousands):

<TABLE>
<CAPTION>
WEIGHTED GREATER
AVERAGE 0-3 3-6 6-9 9-12 THAN
RATE MONTHS MONTHS MONTHS MONTHS 12 MONTHS TOTAL
-------- ------- ------- ------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST BEARING ASSETS
Portfolio assets(1)......... N/A $14,369 $ 2,305 $ 4,060 $1,453 $17,250 $ 39,437
Automobile loans and student
finance receivables(2).... 19.03% 24,789 553 579 607 2,733 29,261
Residual interests in
securitizations........... 13.14% 5,359 4,393 5,079 3,142 37,688 55,661
------- ------- ------- ------ ------- --------
$44,517 $ 7,251 $ 9,718 $5,202 $57,671 $124,359
======= ======= ======= ====== ======= ========
INTEREST BEARING LIABILITIES
Lines of credit:(3)
Portfolio assets............ 9.21% $ 9,600 $28,715 -- -- -- $ 38,315
Automobile loans and student
finance receivables....... 8.41% 20,092 -- -- -- -- 20,092
Residual interests in
securitizations........... 9.50% 4,257 -- -- -- -- 4,257
------- ------- ------- ------ ------- --------
$33,949 $28,715 -- -- -- $ 62,664
======= ======= ======= ====== ======= ========
Company credit facility..... 10.48% -- -- -- -- $77,000 $ 77,000
</TABLE>

- ---------------

(1) Portfolio assets are shown based on estimated proceeds from disposition,
which could occur much faster or slower than anticipated or as directed.

(2) Automobile loans and consumer loans are shown in the table based upon the
expected date of sale or repayment.

(3) Lines of credit mature in the periods indicated. This does not necessarily
indicate when the outstanding balances would be paid. The lines of credit
fund up to 100% of the corresponding asset class. If the asset balance
declines whether through a sale or a payment from the borrower, the
corresponding liability must be paid.

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<PAGE> 44

OTHER MATTERS

YEAR 2000

The Company did not experience any disruptions in its operations during the
transition into the Year 2000. In the fourth quarter of 1999, the Company
completed necessary assessments, modifications or replacement and testing of
systems critical to the Company's operations and believed it had met its Year
2000 readiness objectives. The amounts incurred and expensed for developing and
carrying out the overall Year 2000 plan totaled approximately $.4 million. While
the Company did not experience any Year 2000 disruptions during the transition
into the Year 2000, it will continue to monitor its operations and systems and
address any date-related problems that may arise as the year progresses.

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<PAGE> 45

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Cash and cash equivalents................................... $ 11,263 $ 5,955
Portfolio Assets, net....................................... 39,437 68,423
Loans receivable, net....................................... 30,144 14,854
Residual interests in securitizations....................... 55,661 41,849
Equity investments in Acquisition Partnerships and Servicing
Entities.................................................. 31,104 41,466
Deferred tax benefit, net................................... 27,101 32,162
Other assets, net........................................... 15,786 15,844
Net assets of discontinued operations....................... 20,126 116,090
-------- --------
Total Assets...................................... $230,622 $336,643
======== ========

LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY

Liabilities:
Notes payable............................................. $169,792 $165,922
Other liabilities......................................... 7,278 7,443
-------- --------
Total Liabilities................................. 177,070 173,365
Commitments and contingencies............................... -- --
Redeemable preferred stock:
Adjusting rate preferred stock, including dividends (in
arrears in 1999) of $1,284 and $642, respectively (par
value $.01, redemption value of $21 per share;
2,000,000 shares authorized; 1,222,901 shares issued
and outstanding)....................................... 26,965 26,323
Shareholders' equity:
Optional preferred stock (par value $.01 per share;
98,000,000 shares authorized; no shares issued or
outstanding)........................................... -- --
Common stock (par value $.01 per share; 100,000,000 shares
authorized; issued and outstanding: 8,333,300 and
8,287,959 shares, respectively)........................ 83 83
Paid in capital........................................... 79,562 78,456
Retained earnings (accumulated deficit)................... (52,663) 58,061
Accumulated other comprehensive income (loss)............. (395) 355
-------- --------
Total Shareholders' Equity........................ 26,587 136,955
-------- --------
Total Liabilities, Redeemable Preferred Stock and
Shareholders' Equity............................. $230,622 $336,643
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

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<PAGE> 46

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Gain on sales of automobile loans......................... $ 10,280 $ 7,214 $ --
Servicing fees............................................ 8,936 5,767 12,066
Gain on resolution of Portfolio Assets.................... 4,054 9,208 24,183
Equity in earnings of Acquisition Partnerships and
Servicing Entities...................................... 11,318 12,827 7,605
Interest income........................................... 20,502 12,590 13,437
Other income.............................................. 3,838 3,938 3,052
Interest income on Class A Certificate.................... -- -- 3,553
--------- -------- -------
Total revenues..................................... 58,928 51,544 63,896
Expenses:
Interest on notes payable................................. 16,291 12,088 11,246
Salaries and benefits..................................... 15,621 13,755 11,793
Provision for loan losses and impairment of residual
interests............................................... 4,302 9,201 6,613
Harbor Merger related expenses............................ -- -- 1,618
Occupancy, data processing, communication and other....... 20,405 16,675 18,212
--------- -------- -------
Total expenses..................................... 56,619 51,719 49,482
--------- -------- -------
Earnings (loss) from continuing operations before income
taxes, minority interest and accounting change............ 2,309 (175) 14,414
Benefit (provision) for income taxes........................ (5,051) 1,132 13,396
--------- -------- -------
Earnings (loss) from continuing operations before minority
interest and accounting change............................ (2,742) 957 27,810
Minority interest........................................... (734) (172) (187)
Cumulative effect of accounting change...................... (765) -- --
--------- -------- -------
Earnings (loss) from continuing operations.................. (4,241) 785 27,623
Earnings (loss) from discontinued operations, net of benefit
(provision) for income taxes of $0-, $(89) and $2,089,
respectively.............................................. (103,915) (20,977) 8,005
--------- -------- -------
Net earnings (loss)......................................... (108,156) (20,192) 35,628
Preferred dividends(1)...................................... (2,568) (5,186) (6,203)
--------- -------- -------
Net earnings (loss) to common shareholders......... $(110,724) $(25,378) $29,425
========= ======== =======
Basic earnings (loss) per common share are as follows:
Earnings (loss) from continuing operations before
accounting change per common share...................... $ (0.73) $ (0.58) $ 3.28
Discontinued operations per common share.................. (12.51) (2.77) 1.23
Cumulative effect of accounting change.................... (0.09) -- --
Net earnings (loss) per common share...................... $ (13.33) $ (3.35) $ 4.51
Weighted average common shares outstanding................ 8,307 7,584 6,518
Diluted earnings (loss) per common share are as follows:
Earnings (loss) from continuing operations before
accounting change per common share...................... $ (0.73) $ (0.58) $ 3.25
Discontinued operations per common share.................. (12.51) (2.77) 1.21
Cumulative effect of accounting change.................... (0.09) -- --
Net earnings (loss) per common share...................... $ (13.33) $ (3.35) $ 4.46
Weighted average common shares outstanding................ 8,307 7,584 6,591
</TABLE>

- ---------------

(1) Includes accumulated dividends in arrears for the six months ended December
31, 1999.

See accompanying notes to consolidated financial statements.

44
<PAGE> 47

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER
NUMBER OF EARNINGS COMPREHENSIVE TOTAL
COMMON COMMON PAID IN (ACCUMULATED INCOME SHAREHOLDERS'
SHARES STOCK CAPITAL DEFICIT) (LOSS) EQUITY
--------- ------ ------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31,
1996....................... 6,513,346 $65 $29,783 $ 54,954 $ -- $ 84,802
Exercise of warrants, options
and purchase of shares
through employee stock
purchase
plan....................... 13,164 -- 318 -- -- 318
Change in subsidiary year
end........................ -- -- -- (1,239) -- (1,239)
Comprehensive income:
Net earnings for 1997...... -- -- -- 35,628 -- 35,628
Foreign currency items..... -- -- -- -- 44 44
---------
Total comprehensive income... 35,672
---------
Preferred dividends.......... -- -- -- (6,203) -- (6,203)
Other........................ -- -- (592) -- -- (592)
--------- --- ------- --------- ----- ---------
BALANCES, DECEMBER 31,
1997....................... 6,526,510 65 29,509 83,140 44 112,758
Exercise of warrants, options
and purchase of shares
through employee stock
purchase
plan....................... 519,299 5 12,675 -- -- 12,680
Issuance of common stock to
acquire the minority
interest of subsidiary..... 41,000 1 2,149 -- -- 2,150
Issuance of common stock in
public offering............ 1,201,150 12 34,123 -- -- 34,135
Comprehensive loss:
Net loss for 1998.......... -- -- -- (20,192) -- (20,192)
Foreign currency items..... -- -- -- -- 311 311
---------
Total comprehensive loss..... (19,881)
---------
Other........................ -- -- -- 299 -- 299
Preferred dividends.......... -- -- -- (5,186) -- (5,186)
--------- --- ------- --------- ----- ---------
BALANCES, DECEMBER 31,
1998....................... 8,287,959 83 78,456 58,061 355 136,955
Purchase of shares through
employee stock purchase
plan....................... 45,341 -- 231 -- -- 231
Issuance of common stock
warrant.................... -- -- 875 -- -- 875
Comprehensive loss:
Net loss for 1999.......... -- -- -- (108,156) -- (108,156)
Foreign currency items..... -- -- -- -- (750) (750)
---------
Total comprehensive loss..... (108,906)
---------
Preferred dividends.......... -- -- -- (2,568) -- (2,568)
--------- --- ------- --------- ----- ---------
BALANCES, DECEMBER 31,
1999....................... 8,333,300 $83 $79,562 $ (52,663) $(395) $ 26,587
========= === ======= ========= ===== =========
</TABLE>

See accompanying notes to consolidated financial statements.

45
<PAGE> 48

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $(108,156) $ (20,192) $ 35,628
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities, net of
effect of acquisitions:
(Earnings) loss from discontinued operations............ 103,915 20,977 (8,005)
Proceeds from resolution of Portfolio Assets............ 19,610 42,976 87,138
Gain on resolution of Portfolio Assets.................. (4,054) (9,208) (24,183)
Purchase of Portfolio Assets and loans receivable,
net................................................... (307) (26,420) (44,350)
Origination of automobile receivables, net of purchase
discount.............................................. (166,476) (119,096) (89,845)
Provision for loan losses and impairment of residual
interests............................................. 4,302 9,201 6,613
Equity in earnings of Acquisition Partnerships and
Servicing Entities.................................... (11,318) (12,827) (7,605)
Proceeds from performing Portfolio Assets and loans
receivable, net....................................... 150,043 144,627 78,813
(Increase) decrease in net deferred tax asset........... 5,061 (1,637) (14,627)
Depreciation and amortization........................... 2,912 2,058 3,273
(Increase) decrease in other assets..................... 895 (10,246) (67,607)
Increase in other liabilities........................... 1,198 12,742 17,264
Adjustment to equity from change in subsidiary year
end................................................... -- -- (1,239)
--------- --------- ---------
Net cash provided by (used in) operating
activities....................................... (2,375) 32,955 (28,732)
--------- --------- ---------
Cash flows from investing activities, net of effect of
acquisitions:
Advances to Acquisition Partnerships and affiliates....... -- -- (50)
Payments on advances to Acquisition Partnerships and
affiliates.............................................. -- -- 1,029
Acquisition of subsidiaries............................... -- -- 1,118
Principal payments on Class A Certificate................. -- -- 46,477
Property and equipment, net............................... (5,321) (1,840) (1,157)
Contributions to Acquisition Partnerships and Servicing
Entities................................................ (15,500) (22,534) (25,282)
Distributions from Acquisition Partnerships and Servicing
Entities................................................ 36,045 28,050 11,833
--------- --------- ---------
Net cash provided by investing activities.......... 15,224 3,676 33,968
--------- --------- ---------
Cash flows from financing activities, net of effect of
acquisitions:
Borrowings under notes payable............................ 237,702 340,680 229,301
Payments of notes payable................................. (235,598) (329,232) (171,115)
Purchase or redemption of special preferred stock......... -- (14,716) (12,567)
Proceeds from issuance of common stock.................... 231 46,815 318
Distributions to minority interest........................ -- -- (5,129)
Preferred dividends paid.................................. (1,926) (6,059) (6,627)
--------- --------- ---------
Net cash provided by financing activities.......... 409 37,488 34,181
--------- --------- ---------
Net cash provided by continuing operations................ $ 13,258 $ 74,119 $ 39,417
Net cash used by discontinued operations.................. (7,950) (95,489) (22,983)
--------- --------- ---------
Net increase (decrease) in cash............................. $ 5,308 $ (21,370) $ 16,434
Cash, beginning of year..................................... 5,955 27,325 10,891
--------- --------- ---------
Cash, end of year........................................... $ 11,263 $ 5,955 $ 27,325
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................ $ 16,097 $ 12,399 $ 10,182
========= ========= =========
Income taxes............................................ $ 235 $ 627 $ 754
========= ========= =========
Non-cash investing activities:
Investment securities received as a result of sales of
loans through securitizations......................... $ 27,306 $ 44,309 $ 6,925
========= ========= =========
Non-cash financing activities:
Dividends accumulated and not paid on preferred stock... $ 1,284 $ 642 $ 1,515
Issuance of common stock warrant........................ 875 -- --
--------- --------- ---------
$ 2,159 $ 642 $ 1,515
========= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

46
<PAGE> 49

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) BASIS OF PRESENTATION

On July 3, 1995, FirstCity Financial Corporation (the "Company" or
"FirstCity") was formed by the merger of J-Hawk Corporation and First City
Bancorporation of Texas, Inc. (the "Merger"). The Company's merger with Harbor
Financial Group, Inc. ("Mortgage Corp.") on July 1, 1997 was accounted for as a
pooling of interests.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include the estimation of future
collections on purchased portfolio assets used in the calculation of net gain on
resolution of portfolio assets, interest rate environments, valuation of the
deferred tax asset, and prepayment speeds and collectibility of loans held in
inventory, securitization trusts and for investment. Actual results could differ
materially from those estimates.

(b) DESCRIPTION OF BUSINESS

The Company is a diversified financial services company with offices
throughout the United States, and a presence in France and Mexico. At December
31, 1999, the Company was engaged in two principal reportable segments: (i)
portfolio asset acquisition and resolution; and (ii) consumer lending. Refer to
Note 10 for operational information related to each of these principal segments.
Effective in the third quarter of 1999, the Company adopted formal plans to
discontinue its mortgage banking operations (refer to Note 2), which had
previously also been reported as a principal segment. Activities related to the
mortgage banking operations have been reclassified in the accompanying
consolidated financial statements to discontinued operations.

In the portfolio asset acquisition and resolution business the Company
acquires and resolves portfolios of performing and nonperforming commercial and
consumer loans and other assets (collectively, "Portfolio Assets" or
"Portfolios"), which are generally acquired at a discount to their legal
principal balance. Purchases may be in the form of pools of assets or single
assets. The Portfolio Assets are generally nonhomogeneous assets, including
loans of varying qualities that are secured by diverse collateral types and
foreclosed properties. Some Portfolio Assets are loans for which resolution is
tied primarily to the real estate securing the loan, while others may be
collateralized business loans, the resolution of which may be based either on
business or real estate or other collateral cash flow. Portfolio Assets are
acquired on behalf of the Company or its wholly owned subsidiaries, and on
behalf of legally independent domestic and foreign partnerships and other
entities ("Acquisition Partnerships" which include the WAMCO Partnerships) in
which a partially owned affiliate of the Company is the general partner and the
Company and other investors are limited partners.

The Company's consumer lending activities include the origination,
acquisition and servicing of sub-prime consumer loans principally secured by
automobiles with the intention of selling the acquired loans in securitization
transactions.

The Company services, manages and ultimately resolves or otherwise disposes
of substantially all of the assets it, its Acquisition Partnerships, or other
related entities acquire. The Company services all such assets until they are
collected or sold and normally does not manage assets for non-affiliated third
parties.

47
<PAGE> 50
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The accompanying consolidated financial statements include the accounts of
all of the majority owned subsidiaries of the Company. Investments in 20 percent
to 50 percent owned affiliates are accounted for on the equity method. All
significant intercompany transactions and balances have been eliminated in
consolidation.

(d) CASH EQUIVALENTS

For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents. The Company has maintained balances in
various operating and money market accounts in excess of federally insured
limits.

(e) PORTFOLIO ASSETS

Portfolio Assets are reflected in the accompanying consolidated financial
statements as non-performing Portfolio Assets, performing Portfolio Assets or
real estate Portfolios. The following is a description of each classification
and the related accounting policy accorded to each Portfolio type:

Non-Performing Portfolio Assets

Non-performing Portfolio Assets consist primarily of distressed loans and
loan related assets, such as foreclosed upon collateral. Portfolio Assets are
designated as non-performing unless substantially all of the loans in the
Portfolio are being repaid in accordance with the contractual terms of the
underlying loan agreements. Such Portfolios are acquired on the basis of an
evaluation by the Company of the timing and amount of cash flow expected to be
derived from borrower payments or other resolution of the underlying collateral
securing the loan.

All non-performing Portfolio Assets are purchased at substantial discounts
from their outstanding legal principal amount, the total of the aggregate of
expected future sales prices and the total payments to be received from
obligors. Subsequent to acquisition, the amortized cost of non-performing
Portfolio Assets is evaluated for impairment on a quarterly basis. A valuation
allowance is established for any impairment identified through provisions
charged to earnings in the period the impairment is identified. No valuation
allowance was required as of December 31, 1999, 1998 or 1997.

Net gain on resolution of non-performing Portfolio Assets is recognized as
income to the extent that proceeds collected exceed a pro rata portion of
allocated cost from the Portfolio. Cost allocation is based on a proration of
actual proceeds divided by total estimated proceeds of the pool. No interest
income is recognized separately on non-performing Portfolio Assets. All
proceeds, of whatever type, are included in proceeds from resolution of
Portfolio Assets in determining the gain on resolution of such assets.
Accounting for Portfolios is on a pool basis as opposed to an individual
asset-by-asset basis.

Performing Portfolio Assets

Performing Portfolio Assets consist primarily of Portfolios of consumer and
commercial loans acquired at a discount from the aggregate amount of the
borrowers' obligation. Portfolios are classified as performing if substantially
all of the loans in the Portfolio are being repaid in accordance with the
contractual terms of the underlying loan agreements.

Performing Portfolio Assets are carried at the unpaid principal balance of
the underlying loans, net of acquisition discounts. Interest is accrued when
earned in accordance with the contractual terms of the loans. The accrual of
interest is discontinued once a loan becomes past due 90 days or more.
Acquisition discounts for the Portfolio as a whole are accreted as an adjustment
to yield over the estimated life of the Portfolio. Accounting for these
Portfolios is on a pool basis as opposed to an individual asset-by-asset basis.

48
<PAGE> 51
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company accounts for performing Portfolio Assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 1141,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
which requires creditors to evaluate the collectibility of both contractual
interest and principal of loans when assessing the need for a loss accrual.
Impairment is measured based on the present value of the expected future cash
flows discounted at the loans' effective interest rates, or the fair value of
the collateral, less estimated selling costs, if any loans are collateral
dependent and foreclosure is probable.

Real Estate Portfolios

Real estate Portfolios consist of real estate assets acquired from a
variety of sellers. Such Portfolios are carried at the lower of cost or fair
value less estimated costs to sell. Costs relating to the development and
improvement of real estate are capitalized, whereas those relating to holding
assets are charged to expense. Income or loss is recognized upon the disposal of
the real estate. Rental income, net of expenses, on real estate Portfolios is
recognized when received. Accounting for the Portfolios is on a pool basis as
opposed to an individual asset-by-asset basis.

(f) LOANS RECEIVABLE

Automobile and consumer finance receivables consist of sub-prime automobile
finance receivables and student loan receivables, which are originated and
acquired from third party dealers and other originators, purchased at a
non-refundable discount from the contractual principal amount. This discount is
allocated between discount available for loan losses and discount available for
accretion to interest income. Discounts allocated to discounts available for
accretion are deferred and accreted to income using the interest method. To date
all acquired discounts have been allocated as discounts available for loan
losses. To the extent the discount is considered insufficient to absorb
anticipated losses on the loans receivable, additions to the allowance are made
through a periodic provision for loan losses (see Note 6). The evaluation of the
allowance considers loan portfolio performance, historical losses, delinquency
statistics, collateral valuations and current economic conditions. Such
evaluation is made on an individual loan basis using static pool analyses.

Interest is accrued when earned in accordance with the contractual terms of
the loans. The accrual of interest is discontinued once a loan becomes past due
90 days or more.

(g) RESIDUAL INTERESTS IN SECURITIZATIONS

The Company has residual interests in securitizations consisting of rated
securities, retained interests and related interest only strips (collectively
referred to as residual interests) which are attributable to loans sold through
securitization transactions by the Company. The residual interests are
classified as available for sale. Accordingly, the Company records these
investments at estimated fair value. The increases or decreases in estimated
fair value are recorded as unrealized gains or losses in the accompanying
consolidated statements of shareholders' equity. The determination of fair value
is based on the present value of the anticipated excess cash flows using
valuation assumptions unique to each securitization. Impairment in the fair
value of residual interests that is deemed to be other than temporary is
reflected in a valuation allowance with provisions charged to earnings in the
period in which the impairment is identified.

(h) PROPERTY AND EQUIPMENT

Property and equipment are carried at cost, less accumulated depreciation
and are included in other assets. Depreciation is provided using accelerated
methods over the estimated useful lives of the assets.

49
<PAGE> 52
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(i) INTANGIBLES

Intangible assets represent the excess of cost over fair value of assets
acquired in connection with purchase transactions (goodwill) as well as the
purchase price of future service fee revenues and are included in other assets.
These intangible assets are amortized over periods estimated to coincide with
the expected life of the underlying asset pool owned or serviced by the acquired
subsidiary. The Company periodically evaluates the existence of intangible asset
impairment on the basis of whether such intangibles are fully recoverable from
the projected, undiscounted net cash flows of the related assets acquired.

An accounting change due to the adoption of Statement of Financial Position
98-5, Reporting on the Cost of Start-Up Activities, which requires previously
capitalized start-up costs including organizational costs to be written off and
future costs related to start-up entities to be charged to expense as incurred,
resulted in a write-off of $.8 million in previously capitalized organizational
costs during the first quarter of 1999 and has been reflected as a cumulative
effect of a change in accounting principle.

(j) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The Company adopted SFAS No. 130 ("SFAS 130"), Reporting Comprehensive
Income as of January 1, 1998. SFAS 130 establishes standards for reporting and
displaying comprehensive income and its components in a financial statement that
is displayed with the same prominence as other financial statements. SFAS 130
also requires the accumulated balance of other comprehensive income to be
displayed separately in the equity section of the consolidated balance sheet.
The adoption of this statement had no material impact on results of operations
or shareholders' equity. The Company's other comprehensive income consists of
foreign currency transactions only and had an accumulated balance of $(395) and
$355 at December 31, 1999 and 1998, respectively.

(k) FOREIGN CURRENCY TRANSLATIONS

The Company has determined that the local currency is the functional
currency for its operations outside the United States (primarily France and
Mexico). Assets and liabilities denominated in foreign functional currencies are
translated at the exchange rate as of the balance sheet date. Translation
adjustments are recorded as a separate component of shareholders' equity in
accumulated other comprehensive income (loss). Revenues, costs and expenses
denominated in foreign currencies are translated at the weighted average
exchange rate for the period.

(l) INCOME TAXES

The Company files a consolidated federal income tax return with its 80% or
greater owned subsidiaries. The Company records all of the allocated federal
income tax provision of the consolidated group in the parent corporation.

Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities and
operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effects of future changes in tax laws or changes in
tax rates are not anticipated. The measurement of deferred tax assets, if any,
is reduced by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.

(m) NET EARNINGS (LOSS) PER COMMON SHARE

Basic net earnings per common share calculations are based upon the
weighted average number of common shares outstanding. Earnings (loss) included
in the earnings per common share calculation are
50
<PAGE> 53
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reduced by minority interest and preferred stock dividends. Potentially dilutive
common share equivalents include warrants and stock options in the diluted
earnings per common share calculations.

(n) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company assesses the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.

(o) RECLASSIFICATIONS

Certain amounts in the financial statements for prior years have been
reclassified to conform with current financial statement presentation.

(2) DISCONTINUED OPERATIONS

Effective during the third quarter of 1999, management of the Company
adopted formal plans to discontinue the operations of Harbor Financial Group,
Inc. (formerly known as FirstCity Mortgage Corp.) and its subsidiaries
(collectively referred to as "Mortgage Corp."), and FC Capital Corp. ("Capital
Corp."). These entities comprise the operations that were previously reported as
the Company's residential and commercial mortgage banking business. As formal
termination plans were adopted and operations at each entity are expected to
cease in the near future (within 12 months), the results of current and
historical operations have been reflected as discontinued operations in the
accompanying consolidated statements of operations. Additionally, a net asset
related to the resolution of activity from the discontinued operations has been
reflected in the accompanying consolidated balance sheets. The following is a
summary of activity related to each of the entity's operations:

Mortgage Corp. -- During the third quarter of 1999, Mortgage Corp. incurred
significant losses from operations and the liquidation of certain assets.
Ultimately, on October 14, 1999, Mortgage Corp. filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Northern District of Texas. In the
filings, the stated assets of Mortgage Corp. were approximately $95 million and
the stated liabilities were approximately $98 million. Additionally, it is
anticipated that the liquidation of any remaining assets will yield proceeds
which are less than the stated amount of the assets as listed in the filings.
The Company does not guarantee any of the debt of Mortgage Corp. nor is there
any recourse to the Company on any of Mortgage Corp.'s liabilities. Furthermore,
management of the Company was not involved in the daily operations of Mortgage
Corp. during a significant portion of the third quarter of 1999 and no longer
has access to financial records of Mortgage Corp.

Based on the above, Mortgage Corp. is deemed insolvent and the Company has
written-off its entire investment in and advances to (collectively referred to
as the Net Investment) Mortgage Corp. At June 30, 1999, the Net Investment in
Mortgage Corp. totaled $50.5 million. The Company did not fund any of the
operations of Mortgage Corp. subsequent to June 30, 1999.

Capital Corp. -- Management of the Company made the decision to completely
exit all mortgage banking activities due to the significant negative impact
realized from Mortgage Corp. The Company ceased acquiring mortgage loans under
Capital Corp.'s platform during the fourth quarter of 1999. At December 31,
1999, Capital Corp. had loans totaling $140 million remaining in its inventory.
A sale of substantially all of the remaining inventory is anticipated to close
near the beginning of the second quarter of 2000, and the remainder of the
wind-down of operations to be completed by the end of the second quarter of
2000.

51
<PAGE> 54
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

It is projected that the only assets remaining from Capital Corp.'s
operations will be the investment securities resulting from the retention of
residual interests in securitization transactions completed by Capital Corp. The
Company has considered the estimated future income from such investment
securities in the computation of the loss from discontinued operations.

A summary of the mortgage banking operation's net assets at December 31,
1998, as previously reported is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Mortgage loans held for sale and other loan receivables..... $1,238,876
Mortgage servicing rights................................... 91,440
Receivable for servicing advances and accrued interest...... 58,161
Residual interests in securitizations....................... 23,893
Other assets................................................ 31,054
----------
Total assets...................................... 1,443,424
Notes payable............................................... 1,296,309
Other liabilities........................................... 31,025
----------
Total liabilities................................. 1,327,334
----------
Net assets of discontinued operations............. $ 116,090
==========
At December 31, 1999, the net assets from discontinued
operations consist of the following:
Investment securities, net of valuation allowance......... $ 28,602
Accrual for loss on operations and disposal of
discontinued operations................................ (8,476)
----------
Net assets of discontinued operations............. $ 20,126
==========
</TABLE>

A summary of the results of operations from the discontinued operations for
the six months ended June 30, 1999 and the years ended December 31, 1998 and
1997 is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ------------------------
JUNE 30, 1999 1998 1997
---------------- ----------- ---------
<S> <C> <C> <C>
Revenues:
Net mortgage warehouse income............... $ 9,486 $ 7,782 $ 3,499
Gain on sale of mortgage loans.............. 39,874 109,383 36,496
Loss on sale of mortgage servicing rights... (8,693) -- --
Servicing fees.............................. 10,370 25,537 14,732
Other....................................... 5,245 5,298 10,999
-------- --------- -------
Total............................... 56,282 148,000 65,726
Expenses:
Salaries and benefits....................... 45,128 68,955 30,398
Amortization of mortgage servicing rights... 7,154 19,110 7,550
Provision for valuation of mortgage
servicing rights......................... 2,294 29,305 --
Provision for loan losses and residual
interests................................ 1,708 1,973 --
Interest on other notes payables............ 3,778 2,800 1,187
Occupancy, data processing, communication
and other................................ 36,903 46,745 20,675
-------- --------- -------
Total............................... 96,965 168,888 59,810
-------- --------- -------
Operating contribution (loss), before direct
taxes....................................... $(40,683) $ (20,888) $ 5,916
======== ========= =======
Operating contribution (loss), net of direct
taxes....................................... $(40,683) $ (20,977) $ 8,005
======== ========= =======
</TABLE>

52
<PAGE> 55
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition to the above loss from discontinued operations during 1999, the
Company also reflected losses in the third quarter related to the write off of
the Company's investment in Mortgage Corp. of $50,558, the write down in the
investment in Capital Corp. of $15,571, offset by the future operations, net of
reserves, of the residual assets of the discontinued business of approximately
$2,897.

(3) LIQUIDITY AND CAPITAL RESOURCES

During the fourth quarter of 1999, the Company completed several
transactions that improved the Company's liquidity position through additional
funding. The transactions were structured to provide the immediate funding needs
of the Company's remaining business units while containing incentives for the
Company to replace the borrowings with other sources of funding over time. Below
is a description of such financing transactions.

The Company renewed and restructured its senior lending facility (the
"Senior Facility"). The Senior Facility was renewed at a maximum available
amount of $88 million. The restructured Senior Facility matures June 2001 and
carries pricing of Libor plus 4% (10.48% at December 31, 1999) on the
outstanding indebtedness thereunder. The Senior Facility provides for a facility
fee of $1.65 million if the loan is paid in full before September 30, 2000, or
$2.5 million if paid thereafter. Defaults at Mortgage Corp. do not constitute
defaults under the Senior Facility. The Senior Facility also requires the
consent of the lenders prior to payment of any common and preferred dividends.
The Company continually evaluates its liquidity position giving priority to
assuring adequate funding levels for its two operating entities. Secondarily,
management will determine when and if it is appropriate to pay the dividends on
the Company's outstanding preferred stock. Currently, there are approximately
1.2 million preferred shares outstanding with accrued dividends of approximately
$1.3 million.

The Company issued $25 million in senior subordinated notes maturing in
December 2003. The notes bear interest at prime plus 3.75% (12.25% at December
31, 1999) during the first year and provide for an increase of 1/2% in the rate
each year thereafter. The redemption price for the notes is equal to the
principal amount of the notes plus any accrued interest through December 31,
1999. The redemption price increases by 1% of the principal amount on January 1,
2000 and each January 1 thereafter. In conjunction with this financing, the
Company issued a warrant for the purchase of 425,000 shares of the Company's
common stock at $2.3125 per share (the closing price on December 21, 1999). The
estimated fair value of such warrant totaling $875 thousand was allocated to
shareholders' equity with an offsetting discount reflected on the debt. Such
discount will be amortized over the life of the debt. The warrant for 250,000
shares of the Company's common stock which was previously issued to the
revolving lender was cancelled in conjunction with this financing and the
restructuring of the Senior Facility. The Company also issued an option to the
note holder allowing it to acquire an additional warrant for 1,975,000 shares of
the non-voting common stock in the Company (currently no such stock is
authorized), which can be exercised after one year if the notes or any portion
thereof remains outstanding, but not prior thereto. The strike price on these
warrants is $2.3125. In the event that the notes are paid prior to the
expiration of such one-year period through a transaction involving the issuance
of warrants, the note holder is entitled to retain sufficient warrants to allow
the note holder to acquire approximately 4.86% of the Company's common stock.
The Company has until May 15, 2000 to take the necessary actions to authorize
the issuance of the non-voting common stock covered by the option.

53
<PAGE> 56
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FirstCity Funding, L.P., the Company's automobile finance business unit,
completed securitizations of $56 million and $100 million of face value of
automobile receivables in 1999. The first transaction was structured with $48.9
million in senior bonds and the balance held by the Company in a residual
interest. The second transaction was structured with $73.7 million in senior
bonds, $9.3 million in junior bonds and the balance held by the Company in a
residual interest. Additionally, subsequent to December 31, 1999, the credit
enhancement provider for the automobile warehouse facility has reestablished
funding to a maximum available funding amount of $70 million ($50 million at
December 31, 1999 with an additional $20 million made available subsequent to
year end). The Company continues to work with the credit enhancement provider on
its automobile securitizations to continue extensions of the waivers and
consents of trigger events occurring from the Company's failure to meet certain
financial covenants resulting from losses in the Company's discontinued mortgage
operations.

- the ability to continue to obtain warehouse financing for consumer
lending operations and identify alternative sources for such funding;

- identify alternative or additional sources of financing on residual
interests obtained from securitization transactions;

- the ability to continue to securitize automobile finance receivables,
either with or without credit enhancement;

- the ability to obtain additional financing required by Commercial Corp.
for investment in additional Portfolio Assets; and

- realize positive cash flows from existing equity investments in Portfolio
Assets

During the first quarter of 2000, the Company completed an automobile
finance receivable securitization containing loans of approximately $41 million.
The ability of the Company to continue to securitize is dependant on numerous
factors including, but not limited to, conditions in the securities market in
general and conditions in the asset-backed securitization market. The Company
does not anticipate a significant down-turn in market conditions that would have
a significant adverse impact on the Company's ability to securitize its loans.

As an additional source of liquidity, the Company can sell portfolio
assets, loans or portions of operating businesses.

54
<PAGE> 57
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Based on the above, management of the Company expects that it will be able
to meet its obligations as they come due during 2000.

(4) MERGERS AND ACQUISITIONS

On July 1, 1997, the Company merged with Mortgage Corp. (the "Harbor
Merger"). The Company issued 1,580,986 shares of its common stock in exchange
for 100% of Mortgage Corp.'s outstanding capital stock in a transaction
accounted for as a pooling of interests. Mortgage Corp. originated and serviced
residential and commercial mortgage loans prior to the Company discontinuance of
operations as discussed previously in Note 2. Mortgage Corp. had approximately
$12 million in equity, assets of over $300 million and 700 employees prior to
the Harbor Merger. The consolidated financial statements of the Company have
been restated to reflect the Harbor Merger as if it occurred at the beginning of
the earliest periods presented.

At year end 1997, an unrelated party exercised warrants to acquire a four
percent minority interest in Mortgage Corp.'s subsidiary, Harbor Financial
Mortgage Corporation. On March 31, 1998, the Company issued 41,000 shares of
common stock in exchange for the four percent minority interest in this
subsidiary.

(5) PORTFOLIO ASSETS

Portfolio Assets are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Non-performing Portfolio Assets............................. $ 72,396 $ 93,716
Performing Portfolio Assets................................. 17,878 24,759
Real estate Portfolios...................................... 7,663 11,267
-------- --------
Total Portfolio Assets............................ 97,937 129,742
Adjusted purchase discount required to reflect Portfolio
Assets at carrying value.................................. (58,500) (61,319)
-------- --------
Portfolio Assets, net............................. $ 39,437 $ 68,423
======== ========
</TABLE>

Portfolio Assets are pledged to secure non-recourse notes payable.

(6) LOANS RECEIVABLE

Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Automobile and consumer finance receivables................. $37,718 $16,475
Other loans held for investment............................. 883 4,273
Allowance for loan losses................................... (8,457) (5,894)
------- -------
Loans receivable, net............................. $30,144 $14,854
======= =======
</TABLE>

55
<PAGE> 58
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The activity in the allowance for loan losses is summarized as follows for
the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balances, beginning of year.......................... $ 5,894 $ 9,282 $ 2,693
Provision for loan losses............................ 368 4,751 6,613
Discounts acquired................................... 26,484 18,334 13,152
Reduction in contingent liabilities.................. -- -- 458
Allocation of reserves to sold loans................. (22,036) (17,133) (1,363)
Charge off activity:
Principal balances charged off..................... (4,362) (12,958) (15,126)
Recoveries......................................... 2,109 3,618 2,855
-------- -------- --------
Net charge offs................................. (2,253) (9,340) (12,271)
-------- -------- --------
Balances, end of year................................ $ 8,457 $ 5,894 $ 9,282
======== ======== ========
</TABLE>

The provision for loan losses during 1998 and 1997 was predominantly for
automobile finance receivables generated by the Company's original automobile
platform, referred to as NAF, that was discontinued in January 1998. During 1997
a note recorded at the time of purchase of the initial automobile finance
receivables pool and contingent on the ultimate performance of the pool was
adjusted to reflect a reduction in anticipated payments due pursuant to the
contingency. The reduction in the recorded contingent liability was recorded as
an increase in the allowance for losses.

(7) RESIDUAL INTERESTS IN SECURITIZATIONS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Rated securities............................................ $ 1,313 $ 2,073
Residual interests.......................................... 62,167 43,874
Accrued interest............................................ 565 352
Valuation allowance......................................... (8,384) (4,450)
------- -------
$55,661 $41,849
======= =======
</TABLE>

The activity related to residual interests is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Balance, beginning of year.............................. $ 41,849 $ 6,935 $ --
Cost allocated from securitizations..................... 27,306 44,309 6,925
Interest accreted....................................... 5,487 2,181 548
Cash received from trusts............................... (15,047) (7,126) (538)
Provision for permanent impairment of value............. (3,934) (4,450) --
-------- ------- ------
Balance, end of year.................................... $ 55,661 $41,849 $6,935
======== ======= ======
</TABLE>

56
<PAGE> 59
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Through December 31, 1999, the Company had completed six securitization
transactions. Three of such transactions were either totally or substantially
comprised of loans acquired under the Company's original automobile finance
program. At December 31, 1999, the carrying value of residual assets related to
these three transactions totaled $16,553. The remainder of the transactions were
comprised of loans acquired under the new automobile finance program and the
carrying value of residual interests from these transactions total $39,108 at
December 31, 1999.

The fair value of residual interests is calculated using estimated loss
rates, prepayment speeds and discount rates. Loss rates used by the Company on
the residuals resulting from the original program range from 15.4% to 19.8%. The
lower rate is used on a transaction that had approximately 35% of the loans
acquired under the new program. A loss rate of 11% is used on the remainder of
the residuals. The Company uses a prepayment speed of 15% on all residuals
resulting from the original program and prepayment speeds ranging from 10% to
15% on the residuals resulting from the new programs. A discount rate of 12% to
15% is used on all residual interests. Additionally, the Company uses a discount
rate of 7.3% on the rated security.

(8) EQUITY INVESTMENTS IN ACQUISITION PARTNERSHIPS AND SERVICING ENTITIES

The Company has investments in Acquisition Partnerships and their general
partners that are accounted for on the equity method. Acquisition Partnerships
invest in Portfolio Assets in a manner similar to the Company, as described in
Note 1. During 1999, the Company also acquired investments in Servicing Entities
that are accounted for on the equity method. Activity relating to the Servicing
Entities was not significant during 1999. The condensed combined financial
position and results of operations of the Acquisition Partnerships (excluding
Servicing Entities), which include the domestic and foreign Acquisition
Partnerships and their general partners, are summarized below:

CONDENSED COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Assets...................................................... $324,954 $295,114
======== ========
Liabilities................................................. 210,967 190,590
Net equity.................................................. 113,987 104,524
-------- --------
$324,954 $295,114
======== ========
Equity investment in Acquisition Partnerships............... $ 29,639 $ 41,466
Equity investment in Servicing Entities..................... 1,465 --
-------- --------
$ 31,104 $ 41,466
======== ========
</TABLE>

CONDENSED COMBINED SUMMARY OF EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Proceeds from resolution of Portfolio Assets......... $124,912 $170,187 $178,222
Gain on resolution of Portfolio Assets............... 51,035 57,628 33,398
Interest income on performing Portfolio Assets....... 16,409 9,714 8,432
Net earnings......................................... $ 36,455 $ 33,706 $ 20,117
======== ======== ========
Equity in earnings of Acquisition Partnerships....... $ 11,444 $ 12,827 $ 7,605
Equity in loss of Servicing Entities................. (126) -- --
-------- -------- --------
$ 11,318 $ 12,827 $ 7,605
======== ======== ========
</TABLE>

57
<PAGE> 60
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) NOTES PAYABLE

Notes payable consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Collateralized loans, secured by Portfolio Assets:
Fixed rate (7.66% at December 31, 1999), due 2002......... $ 21,873 $ 32,656
French franc LIBOR plus 3.50%, due 1999................... -- 8,865
LIBOR (6.48% at December 31, 1999) plus 4% to 5%, due
2000................................................... 16,442 18,105
Japanese yen LIBOR plus 3.50%, due 1999................... -- 1,260
Collateralized loans, secured by automobile finance
receivables:
LIBOR plus 1.00% to 3.00%, due 1999....................... -- 7,017
Commercial paper (5.74% at December 31, 1999) combined
with certain facility fees, due 2000................... 20,092 --
Collateralized loan, secured by residual interests in
securitizations:
Prime (8.50% at December 31, 1999) plus 1.00%, due 2000... 4,257 --
Repurchase agreements, secured by investment securities:
LIBOR plus 3.00%, due 1999................................ -- 9,478
Senior Credit Facility, secured and with recourse to the
Company................................................... 77,000 84,807
Senior subordinated notes................................... 24,125 --
Other borrowings, secured by fixed assets................... 2,604 780
-------- --------
Notes payable, secured.................................... 166,393 162,968
Notes payable to others at various fixed rates between 7%
and 10%, due at various dates through 2002............. 3,399 2,954
-------- --------
$169,792 $165,922
======== ========
</TABLE>

Refer to Note 3 for a description of terms related to the Company's Senior
Credit Facility, Senior subordinated notes and automobile finance receivable
warehouse line at December 31, 1999 and other matters concerning the Company's
liquidity.

Under terms of certain borrowings, the Company and its subsidiaries are
required to maintain certain tangible net worth levels and debt to equity and
debt service coverage ratios. The terms also restrict future levels of debt. The
aggregate maturities of notes payable for the four years ending December 31,
2003 are as follows: $45,076 in 2000, $77,357 in 2001, $22,217 in 2002 and
$25,142 in 2003.

58
<PAGE> 61
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) SEGMENT REPORTING

As previously described in Note 1, at December 31, 1999, the Company was
engaged in two reportable segments i) portfolio asset acquisition and
resolution; and ii) consumer lending. These segments have been segregated based
on products and services offered by each. Prior to June 30, 1999, the Company
also reflected operations from its mortgage banking segment. As described in
Note 2, the Company has discontinued operations in the mortgage banking segment
effective in the third quarter of 1999. Accordingly, all activity related to the
mortgage banking segment has been reclassified as discontinued operations in the
consolidated financial statements. The following is a summary of results of
operations for each of the two remaining segments and a reconciliation to net
earnings (loss) from continuing operations for 1999, 1998 and 1997.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
PORTFOLIO ASSET ACQUISITION AND RESOLUTION:
Revenues:
Gain on resolution of Portfolio Assets................. $ 4,054 $ 9,208 $24,183
Equity in earnings of Acquisition Partnerships and
Servicing Entities.................................... 11,318 12,827 7,605
Servicing fees......................................... 3,850 3,062 11,513
Other.................................................. 6,275 4,185 4,402
------- ------- -------
Total............................................. 25,497 29,282 47,703
Expenses:
Salaries and benefits.................................. 4,864 4,619 5,353
Interest on notes payable.............................. 3,710 5,118 7,084
Asset level expenses, occupancy, data processing and
other................................................. 6,217 7,204 12,103
------- ------- -------
Total............................................. 14,791 16,941 24,540
------- ------- -------
Operating contribution before direct taxes................ $10,706 $12,341 $23,163
======= ======= =======
Operating contribution, net of direct taxes............... $10,620 $12,284 $22,970
======= ======= =======
CONSUMER LENDING:
Revenues:
Gain on sale of automobile loans....................... $10,280 $ 7,214 $ --
Interest income........................................ 17,787 10,035 10,182
Servicing fees......................................... 5,086 2,705 553
Other.................................................. 171 106 (454)
------- ------- -------
Total............................................. 33,324 20,060 10,281
Expenses:
Salaries and benefits.................................. 8,053 5,602 2,959
Provision for loan losses and impairment of residual
interests............................................. 4,302 9,201 6,613
Interest on notes payable.............................. 3,932 3,196 3,033
Occupancy, data processing and other................... 11,283 5,819 3,272
------- ------- -------
Total............................................. 27,570 23,818 15,877
------- ------- -------
Operating contribution (loss) before direct taxes......... $ 5,754 $(3,758) $(5,596)
======= ======= =======
Operating contribution (loss), net of direct taxes........ $ 5,689 $(3,758) $(5,599)
======= ======= =======
Total operating income, net of direct taxes....... $16,309 $ 8,526 $17,371
======= ======= =======
</TABLE>

59
<PAGE> 62
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CORPORATE OVERHEAD:
Revenues:
Interest income on Class A Certificate................. $ -- $ -- $ 3,553
Other.................................................. 107 2,202 2,359
------- ------- -------
Total............................................. 107 2,202 5,912
Corporate interest expense................................ (8,649) (3,774) (1,129)
Salaries and benefits, occupancy, professional and other
expenses............................................... (7,108) (7,358) (6,505)
Deferred tax benefit (provision) from NOLs................ (4,900) 1,189 13,592
Harbor Merger related expenses............................ -- -- (1,618)
------- ------- -------
Net earnings (loss) from continuing operations............ $(4,241) $ 785 $27,623
======= ======= =======
</TABLE>

Total assets for each of the segments and a reconciliation to total assets
is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Portfolio acquisition and resolution assets................. $ 71,479 $114,596
Consumer assets............................................. 85,261 52,029
Deferred tax benefit, net................................... 27,101 32,162
Other assets, net........................................... 26,655 21,766
Net assets of discontinued operations....................... 20,126 116,090
-------- --------
Total assets...................................... $230,622 $336,643
======== ========
</TABLE>

(11) PREFERRED STOCK, SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE

In May 1998, the Company closed the public offering of 1,542,150 shares of
FirstCity common stock, of which 341,000 shares were sold by selling
shareholders. Net proceeds (after expenses) of $34.1 million were used to retire
debt. On May 11, 1998, the Company notified holders of its outstanding 1995
warrants to purchase shares of common stock that it was exercising its option to
repurchase such warrants for $1.00 each. In June 1998, as a result of such
notification, warrants representing 471,380 shares of common stock were
exercised for an aggregate warrant purchase price of $11.8 million. On July 17,
1998 the Company filed a shelf registration statement with the Securities and
Exchange Commission which allows the Company to issue up to $250 million in debt
and equity securities from time to time in the future. The registration
statement became effective July 28, 1998. As of December 31, 1999, there have
been no securities issued under this registration statement.

As previously discussed in Note 3, in connection with the issuance of $25
million in senior subordinated debt, the Company issued a warrant for the
purchase of 425,000 shares of the Company's common stock at $2.3125 per share
(the closing price on the date of issuance of December 21, 1999). The estimated
fair value of the warrant totaling $875, was allocated to shareholders' equity
with an offsetting discount reflected on the debt.

The Company also issued an option to the note holder allowing it to acquire
an additional warrant for 1,975,000 shares of non-voting common stock in the
Company (currently no such stock is authorized), which can be exercised after
one year if the notes or any portion thereof remains outstanding, but not prior
thereto. The strike price on these warrants is also $2.3125. In the event that
the notes are paid prior to the expiration of such one-year period through a
transaction involving the issuance of warrants, the note holder is entitled to
retain sufficient warrants to allow the note holder to acquire approximately
4.86% of the Company's common

60
<PAGE> 63
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock. The Company has until May 15, 2000 to take the necessary actions to
authorize the issuance of the non-voting common stock covered by the option.

The holders of shares of common stock are entitled to one vote for each
share on all matters submitted to a vote of common shareholders. In order to
preserve certain tax benefits available to the Company, transactions involving
shareholders holding or proposing to acquire more than 4.75% of outstanding
common shares are prohibited unless the prior approval of the Board of Directors
is obtained.

In 1997, the Company purchased 537,430 shares (representing $11.3 million
in liquidation preference) of special preferred stock. The special preferred
stock was redeemed for $14.7 million plus accrued dividends in 1998. Dividends
of $2.7 million and $5.8 million, respectively, or $3.15 per share, were paid in
1998 and 1997.

In June 1997, the Company initiated an offer to exchange one share of
special preferred stock for one share of the newly designated adjusting rate
preferred stock. The adjusting rate preferred stock has a redemption value of
$21.00 per share and cumulative quarterly cash dividends at the annual rate of
$3.15 per share through September 30, 1998, adjusting to $2.10 per share through
the redemption date of September 30, 2005. The Company may redeem the adjusting
rate preferred stock after September 30, 2003 for $21 per share plus accrued
dividends. The adjusting rate preferred stock carries no voting rights except in
the event of non-payment of dividends. Pursuant to the exchange offer, 1,073,704
shares in 1997 and 149,197 shares in 1998 of special preferred stock were
exchanged for a like number of shares of adjusting rate preferred stock.
Dividends of $1.9 million, $3.4 million and $.8 million, respectively, or
$1.575, $3.15 and $.7875 per share, respectively, were paid in 1999, 1998 and
1997. In the third quarter of 1999, dividends on the Company's adjusting rate
preferred stock were suspended. At December 31, 1999, accumulated dividends in
arrears on such preferred stock totaled $1.3 million, or $1.05 per share. If the
Company fails to pay quarterly dividends for any six consecutive or
non-consecutive quarters, the holders of adjusting rate preferred stock are
entitled to elect two directors to the Company's Board until cumulative
dividends have been paid in full.

The Board of Directors of the Company may designate the relative rights and
preferences of the optional preferred stock when and if issued. Such rights and
preferences can include liquidation preferences, redemption rights, voting
rights and dividends and shares can be issued in multiple series with different
rights and preferences. The Company has no current plans for the issuance of an
additional series of optional preferred stock.

The Company has stock option and award plans for the benefit of key
individuals, including its directors, officers and key employees. The plans are
administered by a committee of the Board of Directors and provide for the grant
of up to a total of 730,000 shares of common stock.

The per share weighted-average fair value of stock options granted during
1999 and 1998 was $2.53 and $23.49, respectively, on the grant date using the
Black-Scholes option pricing model with the following assumptions: $0 expected
dividend yield, risk-free interest rate of 6.0%, expected volatility of 30%, and
an expected life of 10 years.

The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock option and award plans and, accordingly, no
compensation cost has been recognized for its stock options in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net earnings

61
<PAGE> 64
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(loss) to common shareholders and net earnings (loss) per common share would
have been reflected as the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
Net earning (loss) to common shareholders:
As reported........................................ $(110,724) $(25,378) $29,425
Pro forma.......................................... (111,078) (26,659) 28,263
Net earning (loss) per common share -- diluted:
As reported........................................ $ (13.33) $ (3.35) $ 4.46
Pro forma.......................................... (13.37) (3.52) 4.29
</TABLE>

Stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year..................... 284,950 $23.06 314,300 $22.64 223,100 $21.07
Granted.................... 310,500 3.06 15,000 29.69 125,200 26.47
Exercised.................. -- -- (12,350) 22.04 (4,750) 20.00
Cancelled.................. (171,150) 22.89 -- -- -- --
Forfeited.................. (48,300) 23.54 (32,000) 22.50 (29,250) 25.91
-------- ------ ------- ------ ------- ------
Outstanding at end of
year..................... 376,000 $ 6.68 284,950 $23.06 314,300 $22.64
======== ====== ======= ====== ======= ======
</TABLE>

At December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $3.06 to $30.75 and 7.12
years, respectively. In addition, 42,000 options were exercisable with a
weighted-average exercise price of $23.57.

The Company has an employee stock purchase plan which allows employees to
acquire approximately 150,000 shares of common stock of the Company at 85% of
the fair value at the end of each quarterly plan period. The value of the shares
purchased under the plan is limited to the lesser of 10% of compensation or
$25,000 per year. Under the plan, 45,341 shares were issued in 1999, 35,220
shares were issued in 1998 and 8,308 shares were issued during 1997. At December
31, 1999, approximately 64,000 shares of common stock are available for issuance
pursuant to the plan.

A reconciliation between the weighted average shares outstanding (in
thousands) used in the basic and diluted EPS computations is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
Net earnings (loss) to common shareholders........... $(110,724) $(25,378) $29,425
========= ======== =======
Weighted average common shares outstanding --basic... 8,307 7,584 6,518
Effect of dilutive securities:
Assumed exercise of stock options.................. -- -- 49
Assumed exercise of warrants....................... -- -- 24
--------- -------- -------
Weighted average common shares
outstanding -- diluted............................. 8,307 7,584 6,591
========= ======== =======
Net earnings (loss)per common share -- basic......... $ (13.33) $ (3.35) $ 4.51
Net earnings (loss) per common share -- diluted...... $ (13.33) $ (3.35) $ 4.46
</TABLE>

62
<PAGE> 65
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No effect was given to dilutive securities in the 1999 and 1998 EPS
calculations as such had an anti-dilutive effect. However, during 1999, an
average of 278,767 options were outstanding that could have a potentially
dilutive basic EPS effect in the future.

(12) INCOME TAXES

Income tax benefit (expense) from continuing operations consists of:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------- ------ -------
<S> <C> <C> <C>
Federal and state current benefit (expense).............. $ 10 $ (505) $(1,231)
Federal deferred benefit (expense)....................... (5,061) 1,637 14,627
------- ------ -------
Total.......................................... $(5,051) $1,132 $13,396
======= ====== =======
</TABLE>

Income taxes attributed to discontinued operations consist of deferred
benefit (expense) totalling $0, $(89) and $2,089 during 1999, 1998 and 1997,
respectively.

The actual income tax benefit (expense) attributable to earnings (loss)
from continuing operations differs from the expected tax benefit (expense)
(computed by applying the federal corporate tax rate of 35% to earnings (loss)
from continuing operations before income taxes, minority interest and accounting
change) as follows:

<TABLE>
<CAPTION>
1999 1998 1997
------- ------ -------
<S> <C> <C> <C>
Computed expected tax benefit (expense).................. $ (808) $ 61 $(5,045)
(Increase) reduction in income taxes resulting from:
Tax effect of Class A Certificate...................... -- -- 1,243
Change in valuation allowance.......................... (4,253) 1,777 19,239
Alternative minimum tax and state income tax........... -- (505) (1,646)
REMIC excess inclusion income.......................... -- -- (268)
Other.................................................. 10 (201) (127)
------- ------ -------
$(5,051) $1,132 $13,396
======= ====== =======
</TABLE>

63
<PAGE> 66
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1999 and 1998, are as
follows:

<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Investments in Acquisition Partnerships, principally due
to differences in basis for tax and financial reporting
purposes............................................... $ 676 $ 2,521
Intangibles, principally due to differences in
amortization........................................... 325 1,613
Book loss reserve greater than tax loss reserve........... 2,960 76
Tax basis in fixed assets greater than book............... 2,118 42
Federal net operating loss carryforward................... 199,633 202,871
--------- ---------
Total gross deferred tax assets................... 205,712 207,123
Valuation allowance....................................... (178,611) (174,358)
--------- ---------
Net deferred tax assets........................... 27,101 32,765
Deferred tax liabilities:
Book basis in servicing rights greater than tax basis..... -- --
Other, net................................................ -- (603)
--------- ---------
Total deferred tax liabilities.................... -- (603)
--------- ---------
Net deferred tax asset...................................... $ 27,101 $ 32,162
========= =========
</TABLE>

The Company has net operating loss carryforwards for federal income tax
purposes of approximately $570.2 million from continuing operations and $130.8
million from discontinued operations at December 31, 1999, available to offset
future federal taxable income, if any, through the year 2019. A valuation
allowance is provided to reduce the deferred tax assets to a level which, more
likely than not, will be realized. During 1999, 1998 and 1997, the Company
adjusted the previously established valuation allowance to recognize a deferred
tax benefit (expense) of $(4.3) million, $1.8 million and $19.2 million,
respectively. The ultimate realization of the resulting net deferred tax asset
is dependent upon generating sufficient taxable income from its continuing
operations remaining prior to expiration of the net operating loss
carryforwards. The expense recognized in 1999 can be attributed to a revaluation
of the realization of the deferred tax asset for the effects of the
discontinuance of the mortgage operations. Although realization is not assured,
management believes it is more likely than not that all of the recorded deferred
tax asset, net of the allowance, will be realized. The amount of the deferred
tax asset considered realizable, however, could be adjusted in the future if
estimates of future taxable income during the carryforward period change. The
change in valuation allowance represents a change in the estimate of the future
taxable income during the carryforward period since the prior year end and the
utilization of net operating loss carryforwards since the Merger. The ability of
the Company to realize the deferred tax asset is periodically reviewed and the
valuation allowance is adjusted accordingly.

(13) EMPLOYEE BENEFIT PLAN

The Company has a defined contribution 401(k) employee profit sharing plan
pursuant to which the Company matches employee contributions at a stated
percentage of employee contributions to a defined maximum. The Company's
contributions to the 401(k) plan were $238 in 1999, $192 in 1998 and $186 in
1997.

(14) LEASES

The Company leases its current headquarters from a related party under a
noncancellable operating lease. The lease calls for monthly payments of $7.5
through its expiration in December 2001 and includes an option

64
<PAGE> 67
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to renew for two additional five-year periods. Rental expense for 1999, 1998 and
1997 under this lease was $90 each year.

The Company also leases office space and equipment from unrelated parties
under operating leases expiring in various years through 2006. Rental expense
under these leases for 1999, 1998 and 1997 was $2.1 million, $1.1 million and
$0.9 million, respectively. As of December 31, 1999, the future minimum lease
payments under all noncancellable operating leases are: $1,366 in 2000, $1,180
in 2001, $1,049 in 2002, $873 in 2003 and $1,952 in 2004 and beyond.

(15) OTHER RELATED PARTY TRANSACTIONS

The Company has contracted with FirstCity Liquidating Trust (the "Trust"),
the Acquisition Partnerships and related parties as a third party loan servicer.
Servicing fees totaling $8.9 million, $5.8 million and $12.1 million (including
$6.8 million from the termination of a management agreement with the Trust) for
1999, 1998 and 1997, respectively, and due diligence fees (included in other
income) were derived from such affiliates.

During 1997, the Company, along with selected Acquisition Partnerships,
sold certain assets to an entity 80% owned by the Company. The gain on the sale
of the assets was deferred and is being recognized as the assets are ultimately
resolved.

(16) COMMITMENTS AND CONTINGENCIES

On October 4, 1999, Chase Securities, Inc. filed suit against the Company
alleging breach of contractual terms outlined in an engagement letter retaining
Chase Securities, Inc. to render financial advisory services to the Company.
Chase Securities, Inc. is demanding approximately $2.4 million in actual
damages, approximately $4 thousand in out of pocket costs, and attorneys fees
and costs. The Company answered these claims on December 3, 1999. A Motion for
Stay pending trial and determination of an action pending in the U.S. District
Court for the Western District of Texas was filed on December 3, 1999. This
matter is in the early stages of discovery and development, the probable outcome
cannot be determined. The Company intends to vigorously defend this suit.

On October 14, 1999, Harbor Financial Group, Inc., Harbor Financial
Mortgage Corporation and certain of their subsidiaries filed voluntary petitions
under Chapter 11 of the United States Bankruptcy Code before the United States
Bankruptcy Court for the Northern District of Texas, Dallas Division. In a
motion filed in those proceedings requesting the appointment of a Chapter 11
Trustee, the debtors have stated that they are reviewing pre-petition transfers
to the Company to determine if those transfers are avoidable. The Company
believes that it has valid defenses to any allegations that might be made to
avoid any pre-petition transfers in connection with the Mortgage Corp.
bankruptcy proceedings.

The Company is involved in various other legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such matters
will not have a material adverse impact on the consolidated financial condition,
results of operations or liquidity of the Company or the Acquisition
Partnerships.

The Company is a 50% owner in an entity that is obligated to advance up to
$2.5 million toward the acquisition of Portfolio Assets from financial
institutions in California. At December 31, 1999, advances of $1.8 million had
been made under the obligation.

65
<PAGE> 68
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(17) FINANCIAL INSTRUMENTS

SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that the Company disclose estimated fair values of its financial
instruments. Fair value estimates, methods and assumptions are set forth below.

(a) CASH AND CASH EQUIVALENTS

The carrying amount of cash and cash equivalents approximated fair value at
December 31, 1999 and 1998.

(b) PORTFOLIO ASSETS AND LOANS RECEIVABLE

The Portfolio Assets and loans receivable are carried at the lower of cost
or estimated fair value. The estimated fair value is calculated by discounting
projected cash flows on an asset-by-asset basis using estimated market discount
rates that reflect the credit and interest rate risks inherent in the assets.
The carrying value of the Portfolio Assets and loans receivable was $69.6
million and $83.3 million, respectively, at December 31, 1999 and 1998. The
estimated fair value of the Portfolio Assets and loans receivable was
approximately $71.8 million and $90.7 million, respectively, at December 31,
1999 and 1998.

Residual interests in securitizations are carried at estimated fair value.
Carrying values which are believed to approximate fair value were $55,661 and
$41,849 at December 31, 1999 and 1998, respectively. The residual interests are
valued using various discount rates, loss and prepayment assumptions, as
described in Note 7.

(d) NOTES PAYABLE

Management believes that the repayment terms for similar rate financial
instruments with similar credit risks and the stated interest rates at December
31, 1999 and 1998 approximate the market terms for similar credit instruments.
Accordingly, the carrying amount of notes payable is believed to approximate
fair value.

(e) REDEEMABLE PREFERRED STOCK

Redeemable preferred stock is carried at redemption value plus accrued but
unpaid dividends. Carrying values were $26,965 and $26,323 at December 31, 1999
and 1998, respectively. Fair market values based on quoted market rates were
$11,770 and $22,165 at December 31, 1999 and 1998, respectively.

66
<PAGE> 69

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
FirstCity Financial Corporation:

We have audited the accompanying consolidated balance sheets of FirstCity
Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstCity
Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.

As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for organizational costs in accordance
with the American Institute of Certified Public Accountants Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities.

KPMG LLP

Fort Worth, Texas
March 31, 2000

67
<PAGE> 70

FIRSTCITY FINANCIAL CORPORATION

SELECTED QUARTERLY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
1999 1998
--------------------------------------- --------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- -------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $10,977 $ 16,396 $ 13,089 $18,466 $13,457 $11,706 $ 10,474 $15,907
Expenses.................................... 11,953 13,539 14,066 17,061 13,934 10,708 15,460 11,617
Earnings (loss) from continuing
operations................................ (2,027) (2,499) (869) 1,154 409 1,524 (4,977) 3,829
Earnings (loss) from discontinued
operations(2)............................. 525 (41,382) (63,058) -- 5,387 6,100 (33,523) 1,059
Net earnings (loss)......................... (1,502) (43,881) (63,927) 1,154 5,796 7,624 (38,500) 4,888
Preferred dividends......................... 642 642 642 642 1,515 1,515 1,514 642
Net earnings (loss) to common
shareholders.............................. $(2,144) $(44,523) $(64,569) $ 512 $4,281 $6,109 $(40,014) $ 4,246
Net earnings (loss) from continuing
operations per common share -- Basic(1)... $(0.32) $ (0.38) $ (0.18) $ 0.06 $(0.17) $ 0.00 $ (0.78) $ 0.38
Net earnings (loss) from continuing
operations per common
share -- Diluted(1)....................... $(0.32) $ (0.38) $ (0.18) $ 0.06 $(0.17) $ 0.00 $ (0.78) $ 0.38
</TABLE>

- ---------------

(1) Includes the effect of accounting change during the first quarter of 1999.

(2) During the second and third quarters of 1999 and the third quarter of 1998,
the Company reflected significant losses from discontinued operations.

The loss in the second quarter 1999 was comprised primarily of losses on
sales of loans of $6.6 million, losses on sales of mortgage servicing rights
of $11.3 million, reserves and write-offs of other assets of $9.1 million,
with the balance representing losses from operations.

The loss in the third quarter 1999 is primarily due to the write-off of
the Company's investment in Mortgage Corp of $50.5 million and Capital Corp
of $15.6 million, offset by a net accrual for future operations of $2.9
million.

The loss in the third quarter of 1998 can be primarily be attributable
to provisions for impairment on mortgage servicing rights totaling $28.7
million.

68
<PAGE> 71

WAMCO PARTNERSHIPS

COMBINED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash........................................................ $ 6,453 $ 12,109
Portfolio Assets, net....................................... 225,622 148,142
Investments in partnerships................................. 1,681 591
Investments in trust certificates........................... 6,486 6,097
Receivable from affiliates.................................. 5,259 54
Deferred profit sharing..................................... 7,882 5,307
Other assets, net........................................... 1,656 2,261
-------- --------
$255,039 $174,561
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable (including $282 and $37 to affiliates in
1999 and 1998, respectively).............................. $ 480 $ 1,086
Accrued liabilities (including $43 to affiliates in 1999)... 2,066 2,010
Deferred compensation....................................... 12,857 9,420
Long-term debt (including $4,930 and $49,849 to affiliates
in 1999 and 1998, respectively)........................... 171,908 105,989
-------- --------
Total liabilities................................. 187,311 118,505
Commitments and contingencies............................... -- --
Preferred equity............................................ 3,556 --
Partners' capital........................................... 64,172 56,056
-------- --------
$255,039 $174,561
======== ========
</TABLE>

See accompanying notes to combined financial statements.

69
<PAGE> 72

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Proceeds from resolution of Portfolio Assets................ $ 51,459 $ 71,473 $159,159
Cost of Portfolio Assets resolved........................... 34,108 49,855 132,626
-------- -------- --------
Gain on resolution of Portfolio Assets...................... 17,351 21,618 26,533
Interest income on performing Portfolio Assets.............. 15,599 8,341 8,432
Interest expense (including $9,624, $4,494 and $8,187 to
affiliates in 1999, 1998 and 1997, respectively).......... (11,425) (7,483) (10,659)
General, administrative and operating expenses.............. (6,949) (10,033) (10,338)
Other income, net........................................... 1,938 1,772 1,008
-------- -------- --------
Net earnings...................................... $ 16,514 $ 14,215 $ 14,976
======== ======== ========
</TABLE>

See accompanying notes to combined financial statements.

70
<PAGE> 73

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
CLASS B
CLASS A EQUITY EQUITY
------------------- --------
GENERAL LIMITED LIMITED GENERAL LIMITED
PARTNERS PARTNERS PARTNERS PARTNERS PARTNERS TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996...... $ 274 $13,410 $ 18,706 $ 373 $ 18,355 $ 51,118
Contributions................... -- -- -- 522 29,592 30,114
Distributions................... (113) (5,522) (16,533) (375) (18,395) (40,938)
Net earnings.................... 111 5,432 1,173 162 8,098 14,976
----- ------- -------- ----- -------- --------
Balance at December 31, 1997...... 272 13,320 3,346 682 37,650 55,270
Contributions................... 10 483 -- 503 34,077 35,073
Distributions................... (111) (5,456) (1,111) (699) (41,125) (48,502)
Net earnings.................... (5) (224) (290) 201 14,533 14,215
----- ------- -------- ----- -------- --------
Balance at December 31, 1998...... 166 8,123 1,945 687 45,135 56,056
Contributions................... 1 40 -- 540 27,558 28,139
Distributions................... (48) (2,355) (440) (527) (33,167) (36,537)
Net earnings.................... 10 476 (81) 250 15,859 16,514
----- ------- -------- ----- -------- --------
Balance at December 31, 1999...... $ 129 $ 6,284 $ 1,424 $ 950 $ 55,385 $ 64,172
===== ======= ======== ===== ======== ========
</TABLE>

See accompanying notes to combined financial statements.

71
<PAGE> 74

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................................. $ 16,514 $ 14,215 $ 14,976
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of loan origination and commitment
fees................................................ 1,334 678 1,707
Provision (credit) for losses......................... -- -- (587)
Gain on resolution of Portfolio Assets................ (17,351) (21,618) (26,533)
Purchase of Portfolio Assets.......................... (107,704) (91,713) (73,734)
Capitalized costs on Portfolio Assets................. (5,304) (2,095) (1,143)
Proceeds from resolution of Portfolio Assets.......... 51,459 71,473 159,159
Increase in Accounts Receivable....................... (62) (406) --
(Increase) decrease in receivable from affiliates..... 284 838 (660)
Increase in deferred profit sharing................... (3,336) (5,307) --
(Increase) decrease in other assets................... (360) 19 (1,556)
Increase (decrease) in accounts payable............... (549) 645 (1,304)
Increase (decrease) in accrued liabilities............ (22) 929 (601)
Increase in deferred compensation..................... 3,437 9,420 --
--------- -------- ---------
Net cash provided by (used in) operating
activities..................................... (61,660) (22,922) 69,724
Cash flows from investing activities:
Contribution to subsidiaries............................. -- -- (185)
Purchase of trust certificates........................... -- (281) (225)
Payments received from trust certificates................ -- -- 191
--------- -------- ---------
Net cash used in operating activities............ -- (281) (219)
Cash flows from financing activities:
Borrowing of debt........................................ 160,903 93,308 34,489
Repayment of debt........................................ (100,057) (56,269) (106,593)
Issuance of preferred equity............................. 3,556 -- --
Capital contributions.................................... 28,139 35,073 30,114
Capital distributions.................................... (36,537) (48,502) (25,420)
--------- -------- ---------
Net cash provided by (used in) financing
activities..................................... 56,004 23,610 (67,410)
--------- -------- ---------
Net increase (decrease) in cash............................ (5,656) 407 2,095
Cash at beginning of year.................................. 12,109 11,702 9,607
--------- -------- ---------
Cash at end of year........................................ $ 6,453 $ 12,109 $ 11,702
========= ======== =========
</TABLE>

Supplemental disclosure of cash flow information (note 6):

Cash paid for interest was approximately $11,104, $6,889 and $11,091 and
for 1999, 1998 and 1997, respectively.

WAMCO IX, WAMCO XXI and WAMCO XXII contributed $1,542 of portfolio assets
in exchange for an equity interest in a related party in 1997. This equity
interest was subsequently distributed to the partners of the partnerships.

In January, 1997 a partner purchased the other 50% interest in the
Whitewater partnership, thus removing $14,043 in Portfolio and other assets
and $14,043 of other liabilities and partners' capital from the accounts of
the combined WAMCO partnerships.

See accompanying notes to combined financial statements.

72
<PAGE> 75

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

(1) ORGANIZATION AND PARTNERSHIP AGREEMENTS

The combined financial statements include the accounts of WAMCO III, Ltd.;
WAMCO V, Ltd.; WAMCO IX, Ltd.; WAMCO XVII, Ltd.; WAMCO XXI, Ltd.; WAMCO XXII,
Ltd.; WAMCO XXIII, Ltd.; WAMCO XXIV, Ltd.; WAMCO XXV, Ltd.; WAMCO XXVI; WAMCO
XXVII; Calibat Fund, LLC; DAP City Partners, L.P.; First B Realty, L.P.; First
Paradee, L.P.; First Street LLC; FC Properties, Ltd; FCS Creamer, Ltd.; FCS
Wildhorse, Ltd.; FCS Wood, Ltd.; GLS Properties, Ltd.; Imperial Fund I, L.P.;
VOJ Partners, L.P. and Whitewater Acquisition Co. One L.P., all of which are
Texas limited partnerships (Acquisition Partnerships or Partnerships). FirstCity
Financial Corporation or its subsidiaries, FirstCity Commercial Corporation and
FirstCity Holdings Corporation, owns limited and general partnership interests
in all of the Partnerships. All significant intercompany balances have been
eliminated.

The Partnerships were formed to acquire, hold and dispose of Portfolio
Assets acquired from the Federal Deposit Insurance Corporation, Resolution Trust
Corporation and other nongovernmental agency sellers, pursuant to certain
purchase agreements or assignments of such purchase agreements. In accordance
with the purchase agreements, the Partnerships retain certain rights of return
regarding the assets related to defective title, past due real estate taxes,
environmental contamination, structural damage and other limited legal
representations and warranties.

Generally, the partnership agreements of the Partnerships provide for
certain preferences as to the distribution of cash flows. Proceeds from
disposition of and payments received on the Portfolio Assets are allocated based
on the partnership and other agreements which ordinarily provide for the payment
of interest and mandatory principal installments on outstanding debt before
payment of intercompany servicing fees and return of capital and restricted
distributions to partners.

Additionally, WAMCO III, Ltd., WAMCO V, Ltd., WAMCO XVII, Ltd., WAMCO XXI,
Ltd. and Whitewater Acquisition Co. One L.P. provide for Class A and Class B
Equity partners in their individual partnership agreements. The Class B Equity
limited partners are allocated 20 percent of cumulative net income recognized by
the respective partnerships prior to allocation to the Class A Equity limited
partners and the general partners.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PORTFOLIO ASSETS

The Partnerships acquire and resolve portfolios of performing and
nonperforming commercial and consumer loans and other assets (collectively,
"Portfolio Assets" or "Portfolios"), which are generally acquired at a discount
to their legal principal balance. Purchases may be in the form of pools of
assets or single assets. The Portfolio Assets are generally nonhomogeneous
assets, including loans of varying qualities that are secured by diverse
collateral types and foreclosed properties. Some Portfolio Assets are loans for
which resolution is tied primarily to the real estate securing the loan, while
others may be collateralized business loans, the resolution of which may be
based either on business or real estate or other collateral cash flow. Portfolio
Assets are acquired on behalf of legally independent partnerships ("Acquisition
Partnerships") in which a corporate general partner, FirstCity Financial
Corporation ("FirstCity") and other investors are limited partners.

73
<PAGE> 76
WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Portfolio Assets are reflected in the accompanying combined financial
statements as non-performing Portfolio Assets, performing Portfolio Assets or
real estate Portfolios. The following is a description of each classification
and the related accounting policy accorded to each Portfolio type:

Non-Performing Portfolio Assets

Non-performing Portfolio Assets consist primarily of distressed loans and
loan related assets, such as foreclosed upon collateral. Portfolio Assets are
designated as non-performing unless substantially all of the loans in the
Portfolio are being repaid in accordance with the contractual terms of the
underlying loan agreements. Such Portfolios are acquired on the basis of an
evaluation by the Partnerships of the timing and amount of cash flow expected to
be derived from borrower payments or other resolution of the underlying
collateral securing the loan.

Net gain on resolution of non-performing Portfolio Assets is recognized as
income to the extent that proceeds collected exceed a pro rata portion of
allocated cost from the Portfolio. Cost allocation is based on a proration of
actual proceeds divided by total estimated proceeds of the Portfolio. No
interest income is recognized separately on non-performing Portfolio Assets. All
proceeds, of whatever type, are included in proceeds from resolution of
Portfolio Assets in determining the gain on resolution of such assets.
Accounting for Portfolios is on a pool basis as opposed to an individual
asset-by-asset basis.

Performing Portfolio Assets

The Partnerships account for performing Portfolio Assets in accordance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
which requires creditors to evaluate the collectibility of both contractual
interest and principal of loans when assessing the need for a loss accrual.
Impairment is measured based on the present value of the expected future cash
flows discounted at the loans' effective interest rates, or the fair value of
the collateral, less estimated selling costs, if any loans are collateral
dependent and foreclosure is probable.

Real Estate Portfolios

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Assets are foreclosed when necessary through an arrangement with an
affiliated entity whereby title to the foreclosed asset is held by the
affiliated entity and a note receivable from the affiliate is held by the
Partnerships. For financial statement presentation, the affiliated entity note
receivable created by the arrangement is included in Portfolio Assets and is
recorded at the lower of allocated cost or fair value less estimated cost to
sell the underlying asset.

(b) INVESTMENT IN TRUST CERTIFICATES

The Partnerships hold an investment in trust certificates, representing an
interest in a REMIC created by the sale of certain Partnership assets. This
interest is subordinate to the senior tranches of the certificate. The
investment is carried at the lower of cost (the unpaid balance of the
certificate, net of acquisition discounts) or fair market value. Interest is
accrued in accordance with the contractual terms of the agreement. Acquisition
discounts are accreted as an adjustment to yield over the estimated life of the
investment.

Under current Federal laws, partnerships are not subject to income taxes;
therefore, no provision has been made for such taxes in the accompanying
combined financial statements. For tax purposes, income or loss is included in
the individual tax returns of the partners.

(d) USE OF ESTIMATES

(3) PORTFOLIO ASSETS

Portfolio Assets are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Non-performing Portfolio Assets............................. $ 121,055 $ 83,530
Performing Portfolio Assets................................. 182,534 94,271
Real estate Portfolios...................................... 39,491 48,212
--------- --------
Total Portfolio Assets............................ 343,080 226,013
Discount required to reflect Portfolio Assets at carrying
value..................................................... (117,458) (77,871)
--------- --------
Portfolio Assets, net............................. $ 225,622 $148,142
========= ========
</TABLE>

Portfolio Assets are pledged to secure non-recourse notes payable.

(4) DEFERRED PROFIT SHARING

In connection with the formation of FC Properties, Ltd. during 1998, an
agreement was entered into which provided for potential payments to the project
manager based on a percentage of total estimated sales. The deferred amount is
amortized into expense in proportion to actual sales realized. The provisions of
the agreement provide that no profit participation will be paid until all debt
of the entity is extinguished and a 20% return on investments is recognized by
the limited partners. During 1999, the long-term debt was extinguished and it is
anticipated the 20% return threshold will be met during 2000. Accordingly, as of

75
<PAGE> 78
WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1999, no profit participation amounts had been paid out. At
December 31, 1999 and 1998, the estimated liability for this profit
participation was $11,767 and $8,429, respectively, and was included in deferred
compensation in the accompanying combined balance sheets. Additionally,
amortization of $761 and $3,122 was recognized during 1999 and 1998,
respectively, and has been included in general, administrative and operating
expense in the accompanying statements of operations.

(5) LONG-TERM DEBT

Long-term debt at December 31, 1999 and 1998 consists of the following:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Senior collateralized loans, secured by Portfolio Assets:
Prime (8.5% at December 31, 1999) plus 0.5% to 7%......... $ 4,650 $ 1,123
LIBOR (5.832% at December 31, 1999) plus 2.25% to 4%...... 142,951 85,452
Fixed rate -- 6.5% to 13%................................. 22,020 18,690
Subordinated collateralized loans, secured by Portfolio
Assets:
Prime (8.5% at December 31, 1999) plus 1% to 7%........... 1,215 724
Uncollateralized intercompany loans:
Prime (8.5% at December 31, 1999) plus 1%................. 1,072 --
-------- --------
$171,908 $105,989
======== ========
</TABLE>

Collateralized loans are typically payable based on proceeds from
disposition of and payments received on the Portfolio Assets.

Contractual maturities (excluding principal and interest payments payable
from proceeds from dispositions of and payments received on the Portfolio
Assets) of long term debt are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
2000.................................................... 140,272
2001.................................................... 11,573
2002.................................................... 9,492
2003.................................................... --
2004.................................................... --
Thereafter.............................................. 10,571
--------
$171,908
========
</TABLE>

It is anticipated that debts maturing in 2000 will be renewed or refinanced
into financing arrangements with terms similar to current facilities.

The loan agreements and master note purchase agreements, under which notes
payable were incurred, contain various covenants including limitations on other
indebtedness, maintenance of service agreements and restrictions on use of
proceeds from disposition of and payments received on the Portfolio Assets. As
of December 31, 1999, the Partnerships were in compliance with the
aforementioned covenants.

In connection with the long term debt, the Partnerships incurred
origination and commitment fees. These fees are amortized proportionate to the
principal reductions on the related notes and are included in general,
administrative and operating expenses. At December 31, 1999 and 1998,
approximately $792 and $1,139, respectively, of origination and commitment fees
are included in other assets, net.

76
<PAGE> 79
WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(6) TRANSACTIONS WITH AFFILIATES

Under the terms of the various servicing agreements between the
Partnerships and FirstCity, FirstCity receives a servicing fee based on proceeds
from resolution of the Portfolio Assets for processing transactions on the
Portfolio Assets and for conducting settlement, collection and other resolution
activities. Included in general, administrative and operating expenses in the
accompanying combined statements of operations is approximately $2,613, $2,752,
and $4,353 in servicing fees incurred by the Partnerships in 1999, 1998 and
1997, respectively.

On January 1, 1997, FirstCity purchased the other limited partner's
interest in Whitewater for $4,165.

During 1997, WAMCO XXI, Ltd. and Whitewater merged into WAMCO XXII, Ltd.
After the merger, WAMCO XXII, Ltd. transferred $47,517 in assets and $516 in
liabilities to Bosque Asset Corporation (Bosque) in exchange for cash and an
investment in Bosque. Subsequent to the transaction, WAMCO XXII, Ltd.
distributed its investment in Bosque to its partners and dissolved. During 1997,
WAMCO IX, Ltd. contributed $3,316 in notes to Bosque in exchange for cash and an
investment in Bosque. Subsequent to the transfer, WAMCO IX, Ltd. distributed its
investment in Bosque to its partners.

(7) FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires that the Partnerships disclose
estimated fair values of their financial instruments. Fair value estimates,
methods and assumptions are set forth below.

(a) CASH, RECEIVABLE FROM AFFILIATES, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The carrying amount of cash, receivable from affiliates, accounts payable
and accrued liabilities approximates fair value at December 31, 1999 and 1998
due to the short-term nature of such accounts.

(b) PORTFOLIO ASSETS

Portfolio Assets are carried at the lower of cost or estimated fair value.
The estimated fair value is calculated by discounting projected cash flows on an
asset-by-asset basis using estimated market discount rates that reflect the
credit and interest rate risk inherent in the assets. The carrying value of
Portfolio Assets was $225,622 and $148,142 at December 31, 1999 and 1998,
respectively. The estimated fair value of the Portfolio Assets was approximately
$277,397 and $174,776 at December 31, 1999 and 1998, respectively.

Investments in trust certificates are carried at the lower of cost or
estimated fair value. Fair value of the investments are estimated by discounting
future anticipated cash flows at a rate consistent with similar types of
investments. The carrying value of Investments in Trust Certificates was $6,486
and $6,097 at December 31, 1999 and 1998, respectively. The estimated fair value
of the Investments in Trust Certificates was approximately $8,335 and $8,419,
respectively.

(d) LONG-TERM DEBT

Management believes that for similar financial instruments with comparable
credit risks, the stated interest rates at December 31, 1999 and 1998
approximate market rates. Accordingly, the carrying amount of long-term debt is
believed to approximate fair value. Additional, the majority of the
partnerships' debt is at variable rates of interest.

77
<PAGE> 80
WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(8) PREFERRED EQUITY

WAMCO XXIV, Ltd. invested in Community Development Investment LLC in 1999.
This investment carries Preferred Equity belonging to a third party. All net
cash flow is payable monthly first to the Preferred Equity member in an amount
equal to its unreturned contribution, plus interest accrued thereon at a rate of
Libor (5.832%) plus 5%, compounded monthly, until such contribution plus accrued
interest is returned in full. The remainder, if any, is distributed to the
common member interest holder, WAMCO XXIV, Ltd. Not withstanding anything to the
contrary, all net losses, net cash use or other situations resulting in a
situation requiring additional contributions shall be allocated to, or made by,
WAMCO XXIV, Ltd.

(9) COMMITMENTS AND CONTINGENCIES

Calibat Fund, LLC has committed to make additional investments in
partnerships up to $710 at December 31, 1999.

The Partnerships are involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such matters
will not have a material adverse impact on the combined financial condition,
results of operations or liquidity of the Partnerships.

78
<PAGE> 81

INDEPENDENT AUDITORS' REPORT

The Partners
WAMCO Partnerships:

We have audited the accompanying combined balance sheets of the WAMCO
Partnerships as of December 31, 1999 and 1998, and the related combined
statements of operations, changes in partners' capital, and cash flows for each
of the years in the three-year period ended December 31, 1999. These combined
financial statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the WAMCO
Partnerships as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.

KPMG LLP

Fort Worth, Texas
March 31, 2000

79
<PAGE> 82

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information called for by this item with respect to the Company's
directors and executive officers is incorporated by reference from the Company's
definitive proxy statement pertaining to the 2000 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION.

The information called for by this item is incorporated by reference from
the Company's definitive proxy statement pertaining to the 2000 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

80
<PAGE> 83

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) 1. Financial Statements

The consolidated financial statements of FirstCity and combined
financial statements of the WAMCO Partnerships (Acquisition Partnerships)
are incorporated herein by reference to Item 8, "Financial Statements and
Supplementary Data," of this Report.

2. Financial Statement Schedules

Financial statement schedules have been omitted because the
information is either not required, not applicable, or is included in Item
8, "Financial Statements and Supplementary Data."

3. Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Joint Plan of Reorganization by First City Bancorporation
of Texas, Inc., Official Committee of Equity Security
Holders and J-Hawk Corporation, with the Participation of
Cargill Financial Services Corporation, Under Chapter 11
of the United States Bankruptcy Code, Case No.
392-39474-HCA-11 (incorporated herein by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K
dated July 3, 1995 filed with the Commission on July 18,
1995).
2.2 -- Agreement and Plan of Merger, dated as of July 3, 1995,
by and between First City Bancorporation of Texas, Inc.
and J-Hawk Corporation (incorporated herein by reference
to Exhibit 2.2 of the Company's Current Report on Form
8-K dated July 3, 1995 filed with the Commission on July
18, 1995).
3.1 -- Amended and Restated Certificate of Incorporation of the
Company (incorporated herein by reference to Exhibit 3.1
of the Company's Current Report on Form 8-K dated July 3,
1995 filed with the Commission on July 18, 1995).
3.2 -- Bylaws of the Company (incorporated herein by reference
to Exhibit 3.2 of the Company's Current Report on Form
8-K dated July 3, 1995 filed with the Commission on July
18, 1995).
4.1 -- Certificate of Designations of the New Preferred Stock
($0.01 par value) of the Company. (incorporated herein by
reference to Exhibit 4.1 to the Company's Current Report
on form 10-K dated March 24, 1998 filed with the
Commission on March 26, 1998).
4.2 -- Warrant Agreement, dated July 3, 1995, by and between the
Company and American Stock Transfer & Trust Company, as
Warrant Agent (incorporated herein by reference to
Exhibit 4.2 of the Company's Current Report on Form 8-K
dated July 3, 1995 filed with the Commission on July 18,
1995).
4.3 -- Registration Rights Agreement, dated July 1, 1997, among
the Company, Richard J. Gillen, Bernice J. Gillen, Harbor
Financial Mortgage Company Employees Pension Plan,
Lindsey Capital Corporation, Ed Smith and Thomas E.
Smith. (incorporated herein by reference to Exhibit 4.3
of the Company's Form 10-K dated March 24, 1998 filed
with the Commission on March 26, 1998).
4.4 -- Stock Purchase Agreement, dated March 24, 1998, between
the Company and Texas Commerce Shareholders Company.
(incorporated herein by reference to Exhibit 4.4 of the
Company's Form 10-K dated March 24, 1998 filed with the
Commission on March 26, 1998).
</TABLE>

81
<PAGE> 84

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.5 -- Registration Rights Agreement, dated March 24, 1998,
between the Company and Texas Commerce Shareholders
Company. (incorporated herein by reference to Exhibit 4.5
of the Company's Form 10-K dated March 24, 1998 filed
with the Commission on March 24, 1998).
9.1 -- Shareholder Voting Agreement, dated as of June 29, 1995,
among ATARA I Ltd., James R. Hawkins, James T. Sartain
and Cargill Financial Services Corporation. (incorporated
herein by reference to Exhibit 9.1 of the Company's Form
10-K dated March 24,1998 filed with the Commission on
March 26, 1998).
10.1 -- Trust Agreement of FirstCity Liquidating Trust, dated
July 3, 1995 (incorporated herein by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K dated
July 3, 1995 filed with the Commission on July 18, 1995).
10.2 -- Investment Management Agreement, dated July 3, 1995,
between the Company and FirstCity Liquidating Trust
(incorporated herein by reference to Exhibit 10.2 of the
Company's Current Report on Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995
10.3 -- Lock-Box Agreement, dated July 11, 1995, among the
Company, NationsBank of Texas, N.A., as lock-box agent,
FirstCity Liquidating Trust, FCLT Loans, L.P., and the
other Trust-Owned Affiliates signatory thereto, and each
of NationsBank of Texas, N.A. and Fleet National Bank, as
co-lenders (incorporated herein by reference to Exhibit
10.3 of the Company's Form 8-A/A dated August 25, 1995
filed with the Commission on August 25, 1995).
10.4 -- Custodial Agreement, dated July 11, 1995, among Fleet
National Bank, as custodian, Fleet National Bank, as
agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and
the Company (incorporated herein by reference to Exhibit
10.4 of the Company's Form 8-A/A dated August 25, 1995
filed with the Commission on August 25, 1995).
10.5 -- Tier 3 Custodial Agreement, dated July 11, 1995, among
the Company, as custodian, Fleet National Bank, as agent,
FCLT Loans, L.P., FirstCity Liquidating Trust, and the
Company, as servicer (incorporated herein by reference to
Exhibit 10.5 of the Company's Form 8-A/A dated August 25,
1995 filed with the Commission on August 25, 1995).
10.6 -- 12/97 Amended and Restated Facilities Agreement, dated
effective as of December 3, 1997, among Harbor Financial
Mortgage Corporation, New America Financial, Inc., Texas
Commerce Bank National Association and the other
warehouse lenders party thereto. (incorporated herein by
reference to Exhibit 10.6 of the Company's Form 10-K
dated March 24, 1998 filed with the Commission March 26,
1998).
10.7 -- Modification Agreement, dated January 26, 1998, to the
Amended and Restated Facilities Agreement, dated as of
December 3, 1997, among Harbor Financial Mortgage
Corporation, New America Financial, Inc. and Chase Bank
of Texas, National Association (formerly known as Texas
Commerce Bank National Association). (incorporated herein
by reference to Exhibit 10,7 of the company's Form 10-K
dated March 24, 1998 filed with the Commission March 26,
1998).
10.8 -- $50,000,000 3/98 Chase Texas Temporary Additional
Warehouse Note, dated March 17, 1998, by Harbor Financial
Mortgage Corporation and New America Financial, Inc., in
favor of Chase Bank of Texas, National Association.
(incorporated herein by reference to Exhibit 10.8 of the
Company's Form 10-K dated March 24, 1998 filed with the
Commission March 26, 1998).
</TABLE>

82
<PAGE> 85

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.9 -- Employment Agreement, dated as of July 1, 1997, by and
between Harbor Financial Mortgage Corporation and Richard
J. Gillen. (incorporated herein by reference to Exhibit
10.9 of the Company's 10-K dated March 24, 1998 filed
with the Commission March 26, 1998).
10.10 -- Employment Agreement, dated as of September 8, 1997, by
and between FirstCity Funding Corporation and Thomas R.
Brower, with similar agreements between FC Capital Corp.
and each of James H. Aronoff and Christopher J.
Morrissey. (incorporated herein by reference to Exhibit
10.10 of the Company's Form 10-K dated March 24, 1998
filed with the Commission March 26, 1998).
10.11 -- Shareholder Agreement, dated as of September 8, 1997,
among FirstCity Funding Corporation, FirstCity Consumer
Lending Corporation, Thomas R. Brower, Scot A. Foith,
Thomas G. Dundon, R. Tyler Whann, Bradley C. Reeves,
Stephen H. Trent and Blake P. Bozman. (incorporated
herein by reference to Exhibit 10.11 of the Company's
Form 10-K dated March 24, 1998 filed with the Commission
March 26, 1998).
10.12 -- Revolving Credit Loan Agreement, dated as of March 20,
1998, by and between FC Properties, Ltd. and Nomura Asset
Capital Corporation. (incorporated herein by reference to
Exhibit 10.12 of the Company's Form 10-K dated March 24,
1998 filed with the Commission March 26, 1998).
10.13 -- Revolving Credit Loan Agreement, dated as of February 27,
1998, by and between FH Partners, L.P. and Nomura Asset
Capital Corporation. (incorporated herein by reference to
Exhibit 10.13 of the Company's Form 10-K dated March 24,
1998 filed with the Commission March 26, 1998).
10.14 -- Note Agreement, dated as of June 6, 1997, among Bosque
Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque
Investment Realty Partners, L.P. and Bankers Trust
Company of California, N.A. (incorporated herein by
reference to Exhibit 10.14 of the Company's Form 10-K
dated March 24, 1998 filed with the Commission March 26,
1998).
10.15 -- 60,000,000 French Franc Revolving Promissory Note, dated
September 25, 1997, by J-Hawk International Corporation
in favor of the Bank of Scotland. (incorporated herein by
reference to Exhibit 10.15 of the Company's Form 10-K
dated March 24, 1998 filed with the Commission March 26,
1998).
10.16 -- Loan Agreement, dated as of September 25, 1997, by and
between Bank of Scotland and J-Hawk International
Corporation. (incorporated herein reference to Exhibit
10.16 of the Company's Form 10-K dated March 24, 1998
filed with the Commission March 26, 1998).
10.17 -- Guaranty Agreement, dated as of September 25, 1997, by
J-Hawk (incorporated herein by reference to Exhibit 10.17
of the Company's Form 10-K dated March 24, 1998 filed
with the Commission March 26, 1998).
10.18 -- Guaranty Agreement, dated as of September 25, 1997, by
FirstCity Financial Corporation in favor of Bank of
Scotland. (incorporated herein by reference to Exhibit
10.18 of the Company's Form 10-K dated March 24, 1998
filed with the Commission March 26, 1998).
10.19 -- Warehouse Credit Agreement, dated as of May 17, 1996,
among ContiTrade Services L.L.C., N.A.F. Auto Loan Trust
and National Auto Funding Corporation. (incorporated
herein by reference to Exhibit 10.19 of the Company's
Form 10-K dated March 24, 1998 filed with the Commission
March 26, 1998).
</TABLE>

83
<PAGE> 86

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.20 -- Funding Commitment, dated as of May 17, 1996 by and
between ContiTrade Services L.L.C. and The Company.
(incorporated herein by reference to Exhibit 10.20 of the
Company's Form 10-K dated March 24, 1998 filed with the
Commission March 26, 1998).
10.21 -- Revolving Credit Agreement, dated as of December 29,
1995, by and between the Company and Cargill financial
Services Corporation, as amended by the Eighth Amendment
to Revolving Credit Agreement dated February 1998.
(incorporated herein by reference to Exhibit 10.21 of the
Company's Form 10-K dated March 24, 1998 filed with the
Commission March 26, 1998).
10.22 -- Master Repurchase Agreement Governing Purchased and Sales
of Mortgage Loans, dated as of July 1998, between Lehman
Commercial Paper Inc. and FHB Funding Corp. (incorporated
herein by reference to Exhibit 10.1 of the Company's Form
10-Q dated August 14, 1998, filed with the Commission
August 18, 1998).
10.23 -- Warehouse Credit Agreement, dated as of April 30, 1998
among ContiTrade Services, L.L.C., FirstCity Consumer
Lending Corporation, FirstCity Auto Receivables L.L.C.
and FirstCity Financial Corporation. (incorporated herein
by reference to Exhibit 10.2 of the Company's Form 10-Q
dated August 14, 1998, filed with the Commission August
16, 1998).
10.24 -- Servicing Agreement, dated as of April 30, 1998 among
FirstCity Auto Receivables L.L.C. , FirstCity Servicing
Corporation of California, FirstCity Consumer Lending
Corporation and ContiTrade Services L.L.C. (incorporated
herein by reference to Exhibit 10.3 of the Company's Form
10-Q dated August 14, 1998, filed with the Commission
August 16, 1998).
10.25 -- Security and Collateral Agreement, dated as of April 30,
1998 among FirstCity Auto Receivables L.L.C., ContiTrade
Services L.L.C. and Chase Bank of Texas, National
Association. (incorporated herein by reference to Exhibit
10.4 of the Company's Form 10-Q dated August 14, 1998,
filed with the Commission August 16, 1998).
10.26 -- Loan Agreement, dated as of July 24, 1998, between
FirstCity Commercial Corporation and CFSC Capital Corp.
XXX (incorporated herein by reference Exhibit 10.5 of the
Company's Form 10-Q dated August 14, 1998, filed with the
Commission on August 18, 1998).
10.27 -- Loan Agreement, dated April 8, 1998 between Bank of
Scotland and the Company (incorporated herein by
reference to Exhibit 10.6 of the Company's Form 10-Q
dated August 14, 1998, filed with the Commission on
August 18, 1998)
10.28 -- First Amendment to Loan Agreement, dated July 20, 1998,
between Bank of Scotland and the Company (incorporated
herein by reference to Exhibit 10.7 of the Company's Form
10-Q dated August 14, 1998, filed with the Commission on
August 18, 1998).
10.29 -- Employment Agreement, dated October 1, 1998, by and
between FirstCity. Financial Mortgage Corporation, and
Buddy L. Terrell (incorporated herein by reference to
Exhibit 10.29 of the Company's Form 10-Q dated May 17,
1999, filed with the commission on May 17, 1999).
</TABLE>

84
<PAGE> 87

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.30 -- Security Agreement, dated as of April 30, 1998 among
Enterprise Funding Corporation, FCAR Receivables L.L.C.,
MBIA Insurance Corporation, FirstCity Funding
Corporation, NationsBank N.A. and CSC Logic/MSA LLP d/b/a
Loan Servicing enterprise (incorporated herein by
reference to Exhibit 10.30 of the Company's Form 10-Q
dated May 17, 1999, filed with the commission on May 17,
1999).
10.31 -- Note purchase agreement, dated March 30, 1999 among
Enterprise Funding Corporation, FCAR Receivables, L.L.C.
and NationsBank, N.A. (incorporated herein by reference
to Exhibit 10.31 of the Company's Form 10-Q dated May 17,
1999, filed with the commission on May 17, 1999).
10.32 -- Custodian Agreement, dated March 30, 1999, among FCAR
Receivables L.L.C., FirstCity Funding Corporation,
NationsBank, N.A., Enterprise Funding Corporation and
Chase Bank of Texas, N.A. (incorporated herein by
reference to Exhibit 10.32 of the Company's Form 10-Q
dated May 17, 1999, filed with the commission on May 17,
1999).
10.33 -- Credit agreement dated effective as of May 28, 1999 made
by and among Harbor Financial Mortgage, New America
Financial, Inc., FirstCity Financial Mortgage
Corporation, and Guaranty Federal Bank F.S.B. as
Administrative Agent and Bank One, Texas, N.A. as
Collateral Agent (incorporated herein by reference to
Exhibit 10.33 of the Company's Form 10-Q dated August 16,
1999, filed with the commission on August 16, 1999).
10.34 -- Tenth Amendment to Loan Agreement, dated August 11, 1999
between Bank of Scotland and the Company (incorporated
herein by reference to Exhibit 10.34 of the Company's
Form 10-Q dated August 16, 1999, filed with the
Commission on August 16, 1999).
10.35 -- Amended and Restated Loan Agreement, dated December 20,
1999, By and Among FirstCity Financial Corporation as
Borrower and The Lenders Named Herein, as Lenders and
Bank of Scotland as Agent (incorporated herein by
reference to Exhibit 10.1 of the Company's Form 8-K dated
December 22, 1999, filed with the commission on December
28, 1999).
10.36 -- Subordinated Secured Senior Note Purchase Agreement,
dated December 20, 1999, between FirstCity Financial
Corporation, as Issuer and IFA Corporation, as Purchaser
(incorporated herein by reference to Exhibit 10.2 of the
Company's Form 8-K dated December 22, 1999, filed with
the commission on December 28, 1999).
10.37 -- Employment Agreement, dated October 1, 1999, by and
between FirstCity Commercial Corporation and Terry R.
DeWitt.
10.38 -- Employment Agreement, dated October 1, 1999, by and
between FirstCity Commercial Corporation and G. Stephen
Fillip.
10.39 -- Shareholder Agreement, dated October 1, 1999, by and
among FirstCity Holdings Corporation, FirstCity
Commercial Corporation, Terry R. DeWitt, G. Stephen
Fillip and James C. Holmes.
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of KPMG LLP.
</TABLE>

85
<PAGE> 88

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1 -- Financial Data Schedule. (Exhibit 27.1 is being submitted
as an exhibit only in the electronic format of this
Quarterly Report on Form 10-K being submitted to the
Securities and Exchange Commission. Exhibit 27.1 shall
not be deemed filed for purposes of Section 11 of the
Securities Act of 1933, Section 18 of the Securities Act
of 1934, as amended, or Section 323 of the Trust
Indenture Act of 1939, as amended, or otherwise be
subject to the liabilities of such sections, nor shall it
be deemed a part of any registration statement to which
it relates.)
</TABLE>

(b) Reports on Form 8-K.

The Company filed the following Current Reports on Form 8-K, with the
Commission during the fourth quarter of 1999.

1. Form 8-K dated December 28, 1999:

Items reported: Item 5 (Other Events)

86
<PAGE> 89

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

FIRSTCITY FINANCIAL CORPORATION

By: /s/ JAMES R. HAWKINS
----------------------------------
James R. Hawkins
Chairman of the Board

April 6, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ JAMES R. HAWKINS Chairman of the Board, April 6, 2000
- ----------------------------------------------------- Chief Executive Officer
James R. Hawkins and Director (Principal
Executive Officer)

/s/ JAMES T. SARTAIN President, Chief Operating April 6, 2000
- ----------------------------------------------------- Officer and Director
James T. Sartain

/s/ GARY H. MILLER Senior Vice President, and April 6, 2000
- ----------------------------------------------------- Chief Financial Officer
Gary H. Miller (Principal financial
officer)

/s/ RICHARD E. BEAN Director April 6, 2000
- -----------------------------------------------------
Richard E. Bean

/s/ C. IVAN WILSON Director April 6, 2000
- -----------------------------------------------------
C. Ivan Wilson

/s/ ROBERT E. GARRISON Director April 6, 2000
- -----------------------------------------------------
Robert E. Garrison

/s/ DANE FULMER Director April 6, 2000
- -----------------------------------------------------
Dane Fulmer
</TABLE>

87
<PAGE> 90

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.2 -- Investment Management Agreement, dated July 3, 1995,
between the Company and FirstCity Liquidating Trust
(incorporated herein by reference to Exhibit 10.2 of the
Company's Current Report on Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995
10.3 -- Lock-Box Agreement, dated July 11, 1995, among the
Company, NationsBank of Texas, N.A., as lock-box agent,
FirstCity Liquidating Trust, FCLT Loans, L.P., and the
other Trust-Owned Affiliates signatory thereto, and each
of NationsBank of Texas, N.A. and Fleet National Bank, as
co-lenders (incorporated herein by reference to Exhibit
10.3 of the Company's Form 8-A/A dated August 25, 1995
filed with the Commission on August 25, 1995).
10.4 -- Custodial Agreement, dated July 11, 1995, among Fleet
National Bank, as custodian, Fleet National Bank, as
agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and
the Company (incorporated herein by reference to Exhibit
10.4 of the Company's Form 8-A/A dated August 25, 1995
filed with the Commission on August 25, 1995).
10.5 -- Tier 3 Custodial Agreement, dated July 11, 1995, among
the Company, as custodian, Fleet National Bank, as agent,
FCLT Loans, L.P., FirstCity Liquidating Trust, and the
Company, as servicer (incorporated herein by reference to
Exhibit 10.5 of the Company's Form 8-A/A dated August 25,
1995 filed with the Commission on August 25, 1995).
10.6 -- 12/97 Amended and Restated Facilities Agreement, dated
effective as of December 3, 1997, among Harbor Financial
Mortgage Corporation, New America Financial, Inc., Texas
Commerce Bank National Association and the other
warehouse lenders party thereto. (incorporated herein by
reference to Exhibit 10.6 of the Company's Form 10-K
dated March 24, 1998 filed with the Commission March 26,
1998).
10.7 -- Modification Agreement, dated January 26, 1998, to the
Amended and Restated Facilities Agreement, dated as of
December 3, 1997, among Harbor Financial Mortgage
Corporation, New America Financial, Inc. and Chase Bank
of Texas, National Association (formerly known as Texas
Commerce Bank National Association). (incorporated herein
by reference to Exhibit 10,7 of the company's Form 10-K
dated March 24, 1998 filed with the Commission March 26,
1998).
10.8 -- $50,000,000 3/98 Chase Texas Temporary Additional
Warehouse Note, dated March 17, 1998, by Harbor Financial
Mortgage Corporation and New America Financial, Inc., in
favor of Chase Bank of Texas, National Association.
(incorporated herein by reference to Exhibit 10.8 of the
Company's Form 10-K dated March 24, 1998 filed with the
Commission March 26, 1998).
10.9 -- Employment Agreement, dated as of July 1, 1997, by and
between Harbor Financial Mortgage Corporation and Richard
J. Gillen. (incorporated herein by reference to Exhibit
10.9 of the Company's 10-K dated March 24, 1998 filed
with the Commission March 26, 1998).
10.10 -- Employment Agreement, dated as of September 8, 1997, by
and between FirstCity Funding Corporation and Thomas R.
Brower, with similar agreements between FC Capital Corp.
and each of James H. Aronoff and Christopher J.
Morrissey. (incorporated herein by reference to Exhibit
10.10 of the Company's Form 10-K dated March 24, 1998
filed with the Commission March 26, 1998).
</TABLE>
<PAGE> 92

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.11 -- Shareholder Agreement, dated as of September 8, 1997,
among FirstCity Funding Corporation, FirstCity Consumer
Lending Corporation, Thomas R. Brower, Scot A. Foith,
Thomas G. Dundon, R. Tyler Whann, Bradley C. Reeves,
Stephen H. Trent and Blake P. Bozman. (incorporated
herein by reference to Exhibit 10.11 of the Company's
Form 10-K dated March 24, 1998 filed with the Commission
March 26, 1998).
10.12 -- Revolving Credit Loan Agreement, dated as of March 20,
1998, by and between FC Properties, Ltd. and Nomura Asset
Capital Corporation. (incorporated herein by reference to
Exhibit 10.12 of the Company's Form 10-K dated March 24,
1998 filed with the Commission March 26, 1998).
10.13 -- Revolving Credit Loan Agreement, dated as of February 27,
1998, by and between FH Partners, L.P. and Nomura Asset
Capital Corporation. (incorporated herein by reference to
Exhibit 10.13 of the Company's Form 10-K dated March 24,
1998 filed with the Commission March 26, 1998).
10.14 -- Note Agreement, dated as of June 6, 1997, among Bosque
Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque
Investment Realty Partners, L.P. and Bankers Trust
Company of California, N.A. (incorporated herein by
reference to Exhibit 10.14 of the Company's Form 10-K
dated March 24, 1998 filed with the Commission March 26,
1998).
10.15 -- 60,000,000 French Franc Revolving Promissory Note, dated
September 25, 1997, by J-Hawk International Corporation
in favor of the Bank of Scotland. (incorporated herein by
reference to Exhibit 10.15 of the Company's Form 10-K
dated March 24, 1998 filed with the Commission March 26,
1998).
10.16 -- Loan Agreement, dated as of September 25, 1997, by and
between Bank of Scotland and J-Hawk International
Corporation. (incorporated herein reference to Exhibit
10.16 of the Company's Form 10-K dated March 24, 1998
filed with the Commission March 26, 1998).
10.17 -- Guaranty Agreement, dated as of September 25, 1997, by
J-Hawk (incorporated herein by reference to Exhibit 10.17
of the Company's Form 10-K dated March 24, 1998 filed
with the Commission March 26, 1998).
10.18 -- Guaranty Agreement, dated as of September 25, 1997, by
FirstCity Financial Corporation in favor of Bank of
Scotland. (incorporated herein by reference to Exhibit
10.18 of the Company's Form 10-K dated March 24, 1998
filed with the Commission March 26, 1998).
10.19 -- Warehouse Credit Agreement, dated as of May 17, 1996,
among ContiTrade Services L.L.C., N.A.F. Auto Loan Trust
and National Auto Funding Corporation. (incorporated
herein by reference to Exhibit 10.19 of the Company's
Form 10-K dated March 24, 1998 filed with the Commission
March 26, 1998).
10.20 -- Funding Commitment, dated as of May 17, 1996 by and
between ContiTrade Services L.L.C. and The Company.
(incorporated herein by reference to Exhibit 10.20 of the
Company's Form 10-K dated March 24, 1998 filed with the
Commission March 26, 1998).
10.21 -- Revolving Credit Agreement, dated as of December 29,
1995, by and between the Company and Cargill financial
Services Corporation, as amended by the Eighth Amendment
to Revolving Credit Agreement dated February 1998.
(incorporated herein by reference to Exhibit 10.21 of the
Company's Form 10-K dated March 24, 1998 filed with the
Commission March 26, 1998).
</TABLE>
<PAGE> 93

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.22 -- Master Repurchase Agreement Governing Purchased and Sales
of Mortgage Loans, dated as of July 1998, between Lehman
Commercial Paper Inc. and FHB Funding Corp. (incorporated
herein by reference to Exhibit 10.1 of the Company's Form
10-Q dated August 14, 1998, filed with the Commission
August 18, 1998).
10.23 -- Warehouse Credit Agreement, dated as of April 30, 1998
among ContiTrade Services, L.L.C., FirstCity Consumer
Lending Corporation, FirstCity Auto Receivables L.L.C.
and FirstCity Financial Corporation. (incorporated herein
by reference to Exhibit 10.2 of the Company's Form 10-Q
dated August 14, 1998, filed with the Commission August
16, 1998).
10.24 -- Servicing Agreement, dated as of April 30, 1998 among
FirstCity Auto Receivables L.L.C. , FirstCity Servicing
Corporation of California, FirstCity Consumer Lending
Corporation and ContiTrade Services L.L.C. (incorporated
herein by reference to Exhibit 10.3 of the Company's Form
10-Q dated August 14, 1998, filed with the Commission
August 16, 1998).
10.25 -- Security and Collateral Agreement, dated as of April 30,
1998 among FirstCity Auto Receivables L.L.C., ContiTrade
Services L.L.C. and Chase Bank of Texas, National
Association. (incorporated herein by reference to Exhibit
10.4 of the Company's Form 10-Q dated August 14, 1998,
filed with the Commission August 16, 1998).
10.26 -- Loan Agreement, dated as of July 24, 1998, between
FirstCity Commercial Corporation and CFSC Capital Corp.
XXX (incorporated herein by reference Exhibit 10.5 of the
Company's Form 10-Q dated August 14, 1998, filed with the
Commission on August 18, 1998).
10.27 -- Loan Agreement, dated April 8, 1998 between Bank of
Scotland and the Company (incorporated herein by
reference to Exhibit 10.6 of the Company's Form 10-Q
dated August 14, 1998, filed with the Commission on
August 18, 1998)
10.28 -- First Amendment to Loan Agreement, dated July 20, 1998,
between Bank of Scotland and the Company (incorporated
herein by reference to Exhibit 10.7 of the Company's Form
10-Q dated August 14, 1998, filed with the Commission on
August 18, 1998).
10.29 -- Employment Agreement, dated October 1, 1998, by and
between FirstCity. Financial Mortgage Corporation, and
Buddy L. Terrell (incorporated herein by reference to
Exhibit 10.29 of the Company's Form 10-Q dated May 17,
1999, filed with the commission on May 17, 1999).
10.30 -- Security Agreement, dated as of April 30, 1998 among
Enterprise Funding Corporation, FCAR Receivables L.L.C.,
MBIA Insurance Corporation, FirstCity Funding
Corporation, NationsBank N.A. and CSC Logic/MSA LLP d/b/a
Loan Servicing enterprise (incorporated herein by
reference to Exhibit 10.30 of the Company's Form 10-Q
dated May 17, 1999, filed with the commission on May 17,
1999).
10.31 -- Note purchase agreement, dated March 30, 1999 among
Enterprise Funding Corporation, FCAR Receivables, L.L.C.
and NationsBank , N.A. (incorporated herein by reference
to Exhibit 10.31 of the Company's Form 10-Q dated May 17,
1999, filed with the commission on May 17, 1999).
</TABLE>
<PAGE> 94

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.32 -- Custodian Agreement, dated March 30, 1999, among FCAR
Receivables L.L.C., FirstCity Funding Corporation,
NationsBank, N.A., Enterprise Funding Corporation and
Chase Bank of Texas, N.A. (incorporated herein by
reference to Exhibit 10.32 of the Company's Form 10-Q
dated May 17, 1999, filed with the commission on May 17,
1999).
10.33 -- Credit agreement dated effective as of May 28, 1999 made
by and among Harbor Financial Mortgage, New America
Financial, Inc., FirstCity Financial Mortgage
Corporation, and Guaranty Federal Bank F.S.B. as
Administrative Agent and Bank One, Texas, N.A. as
Collateral Agent. (incorporated herein by reference to
Exhibit 10.33 of the Company's Form 10-Q dated August 16,
1999, filed with the commission on August 16, 1999)
10.34 -- Tenth Amendment to Loan Agreement, dated August 11, 1999
between Bank of Scotland and the Company. (incorporated
herein by reference to Exhibit 10.34 of the Company's
Form 10-Q dated August 16, 1999, filed with the
Commission on August 16, 1999).
10.35 -- Amended and Restated Loan Agreement, dated December 20,
1999, By and Among FirstCity Financial Corporation as
Borrower and the Lenders Named Herein, as Lenders and
Bank of Scotland as Agent (incorporated herein by
reference to Exhibit 10.1 of the Company's Form 8-K dated
December 22, 1999, filed with the commission on December
28, 1999).
10.36 -- Subordinated Secured Senior Note Purchase Agreement,
dated December 20, 1999, between FirstCity Financial
Corporation, as Issuer and IFA Corporation, as Purchaser
(incorporated herein by reference to Exhibit 10.2 of the
Company's Form 8-K dated December 22 1999, filed with the
commission on December 28, 1999).
10.37 -- Employment Agreement, dated October 1, 1999, by and
between FirstCity Commercial Corporation and Terry R.
DeWitt.
10.38 -- Employment Agreement, dated October 1, 1999, by and
between FirstCity Commercial Corporation and G. Stephen
Fillip.
10.39 -- Shareholder Agreement, dated October 1, 1999, by and
among FirstCity Holdings Corporation, FirstCity
Commercial Corporation, Terry R. DeWitt, G. Stephen
Fillip and James C. Holmes.
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of KPMG LLP.
27.1 -- Financial Data Schedule. (Exhibit 27.1 is being submitted
as an exhibit only in the electronic format of this
Quarterly Report on Form 10-K being submitted to the
Securities and Exchange Commission. Exhibit 27.1 shall
not be deemed filed for purposes of Section 11 of the
Securities Act of 1933, Section 18 of the Securities Act
of 1934, as amended, or Section 323 of the Trust
Indenture Act of 1939, as amended, or otherwise be
subject to the liabilities of such sections, nor shall it
be deemed a part of any registration statement to which
it relates.)
</TABLE>

<PAGE> 1
EXHIBIT 10.37

EMPLOYMENT AGREEMENT

This Employment Agreement (this "Agreement") is made as of OCTOBER 1,
1999, by and between FIRSTCITY COMMERCIAL CORPORATION, a Texas corporation (the
"Employer"), and Terry R. DeWitt, an individual (the "Executive"). The parties,
intending to be legally bound, agree as follows:

1. DEFINITIONS

For the purposes of this Agreement, the following terms have the
meanings specified or referred to in this Section 1.

"AGREEMENT" means this Employment Agreement, as amended from time to
time.

"BASIC COMPENSATION" means Salary and Benefits.

"BENEFITS" has the meaning as defined in Section 3.1(b).

"BOARD OF DIRECTORS" means the board of directors of the Employer.

"BONUS COMMITTEE" means Terry R. DeWitt, G. Stephen Fillip and James C.
Holmes; provided, however, if any of the foregoing is not an employee of the
Employer as of the last day of the Computation Year in question, then such
person shall be replaced by a person designated by the Board of Directors.

"BONUS POOL" means:

(a) for the Computation Year ending December 31, 1999, $600,000;

(b) for the Computation Year ending December 31, 2000: (a) if the
Return on Equity for the Computation Year ending December 31, 2000 is at
least 15% but less than 20%, 5% of Net Earnings for the Computation Year
ending December 31, 2000; and (b) if the Return on Equity for the
Computation Year ending December 31, 2000 s 20% or more, 10% of Net
Earnings for the Computation Year ending December 31, 2000;

(c) for the Computation Year ending December 31, 2001: (a) if the
Return on Equity for the Computation Year ending December 31, 2001 is at
least 15% but less than 20%, 5% of Net Earnings for the Computation Year
ending December 31, 2001; and (b) if the Return on Equity for the
Computation Year ending December 31, 2001 is 20% or more, 10% of Net
Earnings for the Computation Year ending December 31, 2001;

(d) for the Computation Year ending December 31, 2002: (a) if the
Return on Equity for the Computation Year ending December 31, 2002 is at
least 15% but less than 20%, 5% of Net Earnings for the Computation Year
ending December 31, 2002; and (b) if the Return on Equity for the
Computation Year ending December 31, 2002 is 20% or more, 10% of Net
Earnings for the Computation Year ending December 31, 2002;

EMPLOYMENT AGREEMENT PAGE 1
<PAGE> 2

(e) for the Computation Year ending December 31, 2003: (a) if the
average Return on Equity for the Computation Years ending December 31,
2000 through December 31, 2003 is at least 15% but less than 20%, 5% of
Net Earnings for the Computation Year ending December 31, 2003; and (b)
if the average Return on Equity for the Computation Years ending
December 31, 2000 through December 31, 2003 is 20% or more, 10% of Net
Earnings for the Computation Year ending December 31, 2003; and

(f) for the Computation Year ending December 31, 2004: (a) if the
average Return on Equity for the Computation Years ending December 31,
2001 through December 31, 2004 is at least 15% but less than 20%, 5% of
Net Earnings for the Computation Year ending December 31, 2004; and (b)
if the average Return on Equity for the Computation Years ending
December 31, 2001 through December 31, 2004 is 20% or more, 10% of Net
Earnings for the Computation Year ending December 31, 2004.

"CAPITAL NOTE" means the promissory note of Employer payable to
FirstCity Financial Corporation, as it may be amended, modified, substituted or
renewed.

"COMPUTATION YEAR" means the Fiscal Year of the Employer for which an
Incentive Bonus is being determined.

"CONFIDENTIAL INFORMATION" means any and all of the following, but only
to the extent such information or documents were created, learned and/or
obtained during the Employment Period (defined below): (a) trade secrets
concerning the business and affairs of the Employer; (b) information concerning
the business and affairs of the Employer (which includes historical financial
statements, financial projections and budgets, historical and projected sales,
capital spending budgets and plans, the names and backgrounds of key personnel,
personnel training and techniques and materials) however documented; and (c)
notes, analysis, compilations, studies, summaries, and other material prepared
by or for the Employer containing or based, in whole or in part, on any
information included in the foregoing.

"DISABILITY" has the meaning as defined in Section 6.2.

"EFFECTIVE DATE" means October 1, 1999.

"EMPLOYEE INVENTION" means any invention, technique, modification,
process, or improvement (whether patentable or not) and any work of authorship
(whether or not copyright protection may be obtained for it) created, conceived,
or developed by the Executive, either solely or in conjunction with others,
during the Employment Period, or a period that includes a portion of the
Employment Period, that relates in any way to, the business then being conducted
by the Employer.

"EMPLOYMENT PERIOD" means the term of the Executive's employment under
this Agreement.

"EMPLOYER" means FirstCity Commercial Corporation.

EMPLOYMENT AGREEMENT PAGE 2
<PAGE> 3

"EQUITY" means the sum of the total shareholder's equity at the
beginning of the Computation Year in question and the average month end balance
of the Capital Note for the Computation Year in question.

"FISCAL YEAR" means the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.

"FOR CAUSE" has the meaning as defined in Section 6.3.

"FOR GOOD REASON" has the meaning as defined in Section 6.4.

"INCENTIVE BONUS" has the meaning as defined in Section 3.2.

"NET EARNINGS" means, for the Computation Year in question, the sum of
(i) the net profit of the Employer (including the overhead allocation as
budgeted and approved by the executive committee of FirstCity Financial
Corporation for the Computation Year in question) before taxes, plus (ii) the
interest on the Capital Note, plus (iii) the year-to-date bonus accrual for
Senior Management.

"PERSON" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, or governmental body.

"POST-EMPLOYMENT PERIOD" has the meaning as defined in Section 8.2.

"PROPRIETARY ITEMS" has the meaning as defined in Section 7.2(a)(iv).

"RETURN ON EQUITY" means, for the Computation Year in question, the
percentage return determined by dividing (i) Net Earnings by (ii) Equity.

"SALARY" has the meaning as defined in Section 3.1(a).

2. EMPLOYMENT TERMS AND DUTIES

2.1 EMPLOYMENT. The Employer hereby employs the Executive, and the
Executive hereby accepts employment by the Employer, upon the terms and
conditions set forth in this Agreement.

2.2 TERM. Subject to the provisions of Section 6, the term of the
Executive's employment under this Agreement will begin on the Effective Date and
end on December 31, 2004.

2.3 DUTIES. The Executive will have such duties as are assigned or
delegated to the Executive by the Board of Directors, and will initially serve
as Co-President of the Employer. The Executive will devote his entire business
time, attention, skill, and energy exclusively to the business of the Employer,
will use his best efforts to promote the success of the Employer's business, and
will cooperate fully with the Board of Directors in the advancement of the best
interests of the Employer. Nothing in this Section 2.3, however, will prevent
the Executive from engaging in additional

EMPLOYMENT AGREEMENT PAGE 3
<PAGE> 4

activities in connection with personal investments and community affairs that
are not inconsistent with the Executive's duties under this Agreement.

3. COMPENSATION

3.1 BASIC COMPENSATION.

(a) SALARY. The Executive will be paid an annual salary of $250,000 (the
"Salary"), which will be payable in equal periodic installments
according to the Employer's customary payroll practices, but no less
frequently than monthly.

(b) BENEFITS. The Executive will, during the Employment Period, be
permitted to participate in such pension, profit sharing, bonus, stock
option, life insurance, hospitalization, major medical, and other
employee benefit plans of the Employer that may be in effect from time
to time, to the extent the Executive is eligible subject to the terms of
those plans (collectively, the "Benefits").

3.2 INCENTIVE BONUS. As additional compensation for the services to be
rendered by the Executive pursuant to this Agreement, the Employer will pay to
the Executive with respect to each Fiscal Year during the Employment Period,
commencing with the Fiscal Year ending December 31, 1999, an incentive bonus
based on the profits of the Employer (the "Incentive Bonus). A reasonable
allocation of the Bonus Pool between the Executive and the other employees of
the Employer shall be prepared by the Bonus Committee and submitted to the Board
of Directors for review and approval. The Incentive Bonus for the Executive for
any Computation Year shall be determined by multiplying (i) the allocation
percentage approved by the Board of Directors for the Executive, by (ii) the
amount of the Bonus Pool. The Incentive Bonus for any Computation Year will be
paid to the Executive on March 15 of the year following the Computation Year.

4. FACILITIES AND EXPENSES

4.1 GENERAL. The Employer will furnish the Executive office space,
equipment, supplies, and such other facilities and personnel as the Employer
deems necessary or appropriate for the performance of the Executive's duties
under this Agreement. The Employer will pay on behalf of the Executive (or
reimburse the Executive for) reasonable expenses incurred by the Executive at
the request of, or on behalf of, the Employer in the performance of the
Executive's duties pursuant to this Agreement, and in accordance with the
Employer's employment policies, including reasonable expenses incurred by the
Executive in attending conventions, seminars, and other business meetings, in
appropriate business entertainment activities, and for promotional expenses. The
Executive must file expense reports with respect to such expenses in accordance
with the Employer's policies.

5. VACATIONS AND HOLIDAYS

The Executive will be entitled to paid vacation each Fiscal Year in
accordance with the vacation policies of the Employer in effect for its
executive officers from time to time. The Executive will be entitled to three
weeks paid vacation. The Executive will also be entitled to the paid holidays
and other paid leave as set forth in and subject to the Employer's policies, as
amended from time to time.

EMPLOYMENT AGREEMENT PAGE 4
<PAGE> 5

6. TERMINATION

6.1 EVENTS OF TERMINATION. The Employment Period, the Executive's Basic
Compensation, Incentive Bonus, Cash Bonus and the Success/Sale Bonus, and any
and all other rights of the Executive under this Agreement or otherwise as an
employee of the Employer will terminate (except as otherwise provided in this
Section 6):

(a) upon the death of the Executive;

(b) upon the disability of the Executive (as defined in Section 6.2)
immediately upon notice from either party to the other, except as to
payment of the Cash Bonus which shall be paid to Executive
notwithstanding any such disability of the Executive;

(c) For Cause (as defined in Section 6.3), immediately upon notice from
the Employer to the Executive, or at such later time as such notice may
specify;or

(d) For Good Reason (as defined in Section 6.4) upon not less than
fifteen (15) days' prior written notice from the Executive to the
Employer and the failure of the Employer to cure the breach or reduction
which constitutes Good Reason during such fifteen (15) day period. In
the event Executive exercises his right to terminate the Agreement under
this subparagraph, all rights of the Employer under this Agreement,
including those set forth in paragraphs 7 and 8 and all subparagraphs
thereof, will terminate and will not be enforceable against Executive.

6.2 DEFINITION OF "DISABILITY". For purposes of Section 6.1, the
Executive will be deemed to have a "disability" if, for physical or mental
reasons, the Executive is unable to perform the Executive's duties under this
Agreement for 120 consecutive days, or 180 days during any twelve (12) month
period, as determined in accordance with this Section 6.2. The disability of the
Executive will be determined by a medical doctor selected by written agreement
of the Employer and the Executive upon the request of either party by notice to
the other. If the Employer and the Executive cannot agree on the selection of a
medical doctor, each of them will select a medical doctor and the two medical
doctors will select a third medical doctor who will determine whether the
Executive has a disability. The determination of the medical doctor selected
under this Section 6.2 will be binding on both parties. The Executive must
submit to a reasonable number of examinations by the medical doctor making the
determination of disability under this Section 6.2, and the Executive hereby
authorizes the disclosure and release to the Employer of such determination and
all supporting medical records. If the Executive is not legally competent, the
Executive's legal guardian or duly authorized attorney-in-fact will act in the
Executive's stead, under this Section 6.2, for the purposes of submitting the
Executive to the examinations, and providing the authorization of disclosure,
required under this Section 6.2.

6.3 DEFINITION OF "FOR CAUSE". For purposes of Section 6.1, the phrase
"For Cause" shall have the meaning as determined under common law, and shall
include, without limitation: (a) the Executive's material breach of this
Agreement; (b) the Executive's failure to adhere to any written Employer policy
if the Executive has been given a reasonable opportunity to comply with such
policy or cure his failure to comply (which reasonable opportunity must be
granted

EMPLOYMENT AGREEMENT PAGE 5
<PAGE> 6

during the ten-day period preceding termination of this Agreement); (c) the
Executive's appropriation (or attempted appropriation) of a material business
opportunity of the Employer, including attempting to secure or securing any
personal profit in connection with any transaction entered into on behalf of the
Employer; (d) the Executive's misappropriation (or attempted misappropriation)
of any of the Employer's funds or property or commission of any act of fraud or
embezzlement by the Executive; (e) willful misconduct or serious or repeated
neglect by the Executive in the performance of his duties hereunder; (f) any
breach by the Executive of any fiduciary duty to the Employer or any serious or
repeated breach by the Executive of any other obligation to the Employer implied
by law; (g) the Executive's conviction of, the indictment for (or its procedural
equivalent), or the entering of a guilty plea or plea of no contest with respect
to, a felony, the equivalent thereof, or any other crime with respect to which
imprisonment is a possible punishment; and (h) the Executive's failure to own
and control at least 7% of the issued and outstanding common shares of FirstCity
Holdings Corporation.

6.4 DEFINITION OF "FOR GOOD REASON". For purposes of Section 6.1, the
phrase "For Good Reason" means any of the following: (a) the Employer's material
breach of this Agreement; (b) a material reduction in Salary or Benefits
provided to the Executive pursuant to this Agreement; (c) the filing of a
voluntary or involuntary petition by or against FirstCity Financial Corporation
or the Employer under Chapter 7 or Chapter 11 of the Bankruptcy Code upon the
appointment of a receiver for FirstCity Financial Corporation or the Employer;
(d) a change in control of FirstCity Financial Corporation or the Employer; or
(e) the budget for the Employer prepared by management and approved by the board
of directors of the Employer cannot be executed because of the failure of
FirstCity Financial Corporation to provide the capital or financing required by
the budget.

6.5 TERMINATION PAY. Effective upon the termination of this Agreement,
the Employer will be obligated to pay the Executive (or, in the event of his
death, his designated beneficiary as defined below) only such compensation as is
provided in this Section 6.5, and in lieu of all other amounts and in settlement
and complete release of all claims the Executive may have against the Employer.
For purposes of this Section 6.5, the Executive's designated beneficiary will be
such individual beneficiary or trust, located at such address, as the Executive
may designate by notice to the Employer from time to time or, if the Executive
fails to give notice to the Employer of such a beneficiary, the Executive's
estate. Notwithstanding the preceding sentence, the Employer will have no duty,
in any circumstances, to attempt to open an estate on behalf of the Executive,
to determine whether any beneficiary designated by the Executive is alive or to
ascertain the address of any such beneficiary, to determine the existence of any
trust, to determine whether any person or entity purporting to act as the
Executive's personal representative (or the trustee of a trust established by
the Executive) is duly authorized to act in that capacity, or to locate or
attempt to locate any beneficiary, personal representative, or trustee.

(a) SALARY. Upon the termination of this Agreement, the Executive will
be entitled to receive his Salary only through the date such termination
is effective.

(b) BENEFITS. The Executive's accrual of, or participation in plans
providing for, the Benefits will cease at the effective date of the
termination of this Agreement, and the Executive will be entitled to
accrued Benefits pursuant to such plans only as provided in such plans
or by operation of law.

EMPLOYMENT AGREEMENT PAGE 6
<PAGE> 7

(c) INCENTIVE BONUSES. Except as provided in Section 6.5(d), the
Incentive Bonuses are only payable in the event that the Executive is
actively employed by Employer on the date the bonus is payable. Except
as provided in Section 6.5(d), upon the termination of this Agreement,
the Executive will not be entitled to any Incentive Bonus.

(d) INCENTIVE BONUSES IN THE EVENT OF DEATH OR DISABILITY. In the event
this Agreement is terminated due to the death or disability of the
Executive, the Executive shall be entitled to an Incentive Bonus for the
Computation Year in which this Agreement is terminated. The amount of
the Incentive Bonus shall be determined in accordance with Section 3.2.

7. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS

7.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges that
(a) during the Employment Period and as a part of his employment, the Executive
will be afforded access to Confidential Information; (b) public disclosure of
such Confidential Information could have an adverse effect on the Employer and
its business; (c) because the Executive possesses substantial technical
expertise and skill with respect to the Employer's business, the Employer
desires to obtain exclusive ownership of each Employee Invention, and the
Employer will be at a substantial competitive disadvantage if it fails to
acquire exclusive ownership of each Employee Invention; (d) Employer has
required that the Executive make the covenants in this Section 7 as a condition
to entering into this Agreement; and (e) the provisions of this Section 7 are
reasonable and necessary to prevent the improper use or disclosure of
Confidential Information and to provide the Employer with exclusive ownership of
all Employee Inventions.

7.2 AGREEMENTS OF THE EXECUTIVE. In consideration of the compensation
and benefits to be paid or provided to the Executive by the Employer under this
Agreement, the Executive covenants as follows:

(a) CONFIDENTIALITY.

(i) During the Employment Period and the Post-Employment Period
(as defined below), the Executive will hold in confidence the
Confidential Information and will not disclose it to any person
except with the specific prior written consent of the Employer or
except as otherwise expressly permitted by the terms of this
Agreement.

(ii) Any trade secrets of the Employer will be entitled to all of
the protections and benefits under applicable law. If any
information that the Employer deems to be a trade secret is found
by a court of competent jurisdiction not to be a trade secret for
purposes of this Agreement, such information will, nevertheless,
be considered Confidential Information for purposes of this
Agreement. The Executive hereby waives any requirement that
Employer submit proof of the economic value of any trade secret
or post a bond or other security.

(iii) None of the foregoing obligations and restrictions applies
to any part of the Confidential Information that the Executive
demonstrates was or became generally available to the public
other than as a result of a disclosure by the Executive.

EMPLOYMENT AGREEMENT PAGE 7
<PAGE> 8

(iv) The Executive will not remove from the Employer's premises
(except to the extent such removal is for purposes of the
performance of the Executive's duties at home or while traveling,
or except as otherwise specifically authorized by the Employer)
any document, record, notebook, plan, model, component, device,
or computer software or code owned by the Employer, whether
embodied in a disk or in any other form (collectively, the
"Proprietary Items"). The Executive recognizes that, as between
the Employer and the Executive, all of the Proprietary Items,
whether or not developed by the Executive, are the exclusive
property of the Employer. Upon termination of this Agreement by
either party, or upon the request of the Employer during the
Employment Period, the Executive will return to the Employer all
of the Proprietary Items in the Executive's possession or subject
to the Executive's control, and the Executive shall not retain
any copies, abstracts, sketches, or other physical embodiment of
any of the Proprietary Items.

(b) EMPLOYEE INVENTIONS. Each Employee Invention will belong exclusively
to the Employer. If it is determined that any such works are not works
made for hire, the Executive hereby assigns to the Employer all of the
Executive's right, title, and interest, including all rights of
copyright, patent, and other intellectual property rights, to or in such
Employee Inventions. The Executive covenants that he will promptly:

(i) disclose to the Employer in writing any Employee Invention;

(ii) assign to the Employer or to a party designated by the
Employer, at the Employer's request and without additional
compensation, all of the Executive's right to the Employee
Invention for the United States and all foreign jurisdictions;

(iii) execute and deliver to the Employer such applications,
assignments, and other documents as the Employer may request in
order to apply for and obtain patents or other registrations with
respect to any Employee Invention in the United States and any
foreign jurisdictions;

(iv) sign all other papers necessary to carry out the above
obligations; and

(v) give testimony and render any other assistance but without
expense to the Executive in support of the Employer's rights to
any Employee Invention.

7.3 DISPUTES OR CONTROVERSIES. The Executive recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. In
the event any arbitration or court proceeding is instigated relating to this
Agreement, the parties to this Agreement agree to make good faith efforts to
preserve the secrecy of any Confidential Information.

8. NON-COMPETITION AND NON-INTERFERENCE

8.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges that:
(a) the services to be performed by him under this Agreement are of a special,
unique, unusual,

EMPLOYMENT AGREEMENT PAGE 8
<PAGE> 9

extraordinary, and intellectual character; (b) the Employer's business is
international in scope; (c) the Employer competes with other businesses that are
or could be located in any part of the world; (d) Employer has required that the
Executive make the covenants set forth in this Section 8 as a condition to
entering into this Agreement; and (e) the provisions of this Section 8 are
reasonable and necessary to protect the Employer's business.

8.2 COVENANTS OF THE EXECUTIVE. In consideration of the acknowledgments
by the Executive, and in consideration of the compensation and benefits to be
paid or provided to the Executive by the Employer, the Executive covenants that
he will not, directly or indirectly:

(a) during the Employment Period, except in the course of his employment
hereunder, and during the Post-Employment Period, engage or invest in,
own, manage, operate, finance, control, or participate in the ownership,
management, operation, financing, or control of, be employed by,
associated with, or in any manner connected with, lend the Executive's
name or any similar name to, lend Executive's credit to or render
services or advice to, any business whose products or activities compete
in whole or in part with the products or activities of the Employer
anywhere within North America; provided, however, that the Executive may
purchase or otherwise acquire up to (but not more than) one percent of
any class of securities of any enterprise (but without otherwise
participating in the activities of such enterprise) if such securities
are listed on any national or regional securities exchange or have been
registered under Section 12(g) of the Securities Exchange Act of 1934;

(b) whether for the Executive's own account or for the account of any
other person, at any time during the Employment Period and the
Post-Employment Period, solicit business of the same or similar type
being carried on by the Employer, from any person known by the Executive
to be a customer of the Employer, whether or not the Executive had
personal contact with such person during and by reason of the
Executive's employment with the Employer;

(c) whether for the Executive's own account or the account of any other
person (i) at any time during the Employment Period and the 180 days
following the Employment Period, solicit, employ, or otherwise engage as
an employee, independent contractor, or otherwise, any person who is or
was an employee of the Employer at any time during the Employment Period
or in any manner induce or attempt to induce any employee of the
Employer to terminate his employment with the Employer; or (ii) at any
time during the Employment Period and the Post-Employent Period,
interfere with the Employer's relationship with any person, including
any person who at any time during the Employment Period was an employee,
contractor, supplier, or customer of the Employer; or

(d) at any time during or after the Employment Period, disparage the
Employer or any of its shareholders, directors, officers, employees, or
agents.

For purposes of this Section 8.2, the term "Post-Employment Period"
means the one (1) year period beginning on the date of termination of the
Executive's employment with the Employer.

For purposes of this Section 8 only, the term "Employer" means the
Employer and/or any of the Employer's subsidiaries or affiliates.

EMPLOYMENT AGREEMENT PAGE 9
<PAGE> 10

If any covenant in this Section 8.2 is held to be unreasonable,
arbitrary, or against public policy, such covenant will be considered to be
divisible with respect to scope, time, and geographic area, and such lesser
scope, time, or geographic area, or all of them, as a court of competent
jurisdiction may determine to be reasonable, not arbitrary, and not against
public policy, will be effective, binding, and enforceable against the
Executive.

The period of time applicable to any covenant in this Section 8.2 will
be extended by the duration of any violation by the Executive of such covenant.
The Executive will, while the covenant under this Section 8.2 is in effect, give
notice to the Employer, within ten (10) days after accepting any other
employment, of the identity of the Executive's employer. The Employer may notify
such employer that the Executive is bound by this Agreement and, at the
Employer's election, furnish such employer with a copy of this Agreement or
relevant portions thereof.

9. GENERAL PROVISIONS

9.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. The Executive acknowledges
that the injury that would be suffered by the Employer as a result of a breach
of the provisions of this Agreement (including any provision of Sections 7 and
8) would be irreparable and that an award of monetary damages to the Employer
for such a breach would be an inadequate remedy. Consequently, the Employer will
have the right, in addition to any other rights it may have, to obtain
injunctive relief to restrain any breach or threatened breach or otherwise to
specifically enforce any provision of this Agreement, and the Employer will not
be obligated to post bond or other security in seeking such relief. Without
limiting the Employer's rights under this Section 9 or any other remedies of the
Employer, if the Executive breaches any of the provisions of Section 7 or 8, the
Employer will have the right to cease making any payments otherwise due to the
Executive under this Agreement.

9.2 COVENANTS OF SECTIONS 7 AND 8 ARE ESSENTIAL AND INDEPENDENT
COVENANTS. The covenants by the Executive in Sections 7 and 8 are essential
elements of this Agreement, and without the Executive's agreement to comply with
such covenants, the Employer would not have entered into this Agreement or
employed or continued the employment of the Executive. The Executive has been
advised to independently consult with the Executive's counsel in all respects
concerning the reasonableness and propriety of such covenants.

The Executive's covenants in Sections 7 and 8 are independent covenants
and the existence of any claim by the Executive against the Employer under this
Agreement or otherwise, or against the Buyer, will not excuse the Executive's
breach of any covenant in Section 7 or 8 unless the Agreement is terminated
pursuant to paragraph 6.1(d) hereof.

If the Executive's employment hereunder expires or is terminated, this
Agreement will continue in full force and effect as is necessary or appropriate
to enforce the covenants and agreements of the Executive in Sections 7 and 8
unless the Agreement is terminated pursuant to paragraph 6.1(d) hereof.

EMPLOYMENT AGREEMENT PAGE 10
<PAGE> 11

any judgment, writ, injunction, or order of any court, arbitrator, or
governmental agency applicable to the Executive; or (b) conflict with, result in
the breach of any provisions of or the termination of, or constitute a default
under, any agreement to which the Executive is a party or by which the Executive
is or may be bound.

9.4 OBLIGATIONS CONTINGENT ON PERFORMANCE. The obligations of the
Employer hereunder, including its obligation to pay the compensation provided
for herein, are contingent upon the Executive's performance of the Executive's
obligations hereunder.

9.5 WAIVER. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other party; (b) no waiver that may be given by
a party will be applicable except in the specific instance for which it is
given; and (c) no notice to or demand on one party will be deemed to be a waiver
of any obligation of such party or of the right of the party giving such notice
or demand to take further action without notice or demand as provided in this
Agreement.

9.6 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED. This Agreement
shall inure to the benefit of, and shall be binding upon, the parties hereto and
their respective successors, assigns, heirs, and legal representatives,
including any entity with which the Employer may merge or consolidate or to
which all or substantially all of its assets may be transferred. The duties and
covenants of the Executive under this Agreement, being personal, may not be
delegated.

9.7 NOTICES. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of receipt), (b)
sent by facsimile (with written confirmation of receipt), provided that a copy
is mailed by registered mail, return receipt requested, or (c) when received by
the addressee, if sent by a nation-ally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and facsimile
numbers set forth below (or to such other addresses and facsimile numbers as a
party may designate by notice to the other parties):

If to Employer: FirstCity Commercial Corporation
P.O. Box 8216
Waco, Texas 76714-8216
Attention: James T. Sartain
Facsimile: 254-751-1208

If to the Executive: Terry R. DeWitt

--------------------------------

EMPLOYMENT AGREEMENT PAGE 11
<PAGE> 12

9.8 ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral or written, between the
parties hereto with respect to the subject matter hereof. This Agreement may not
be amended orally, but only by an agreement in writing signed by the parties
hereto.

9.9 GOVERNING LAW. This Agreement will be governed by the laws of the
State of Texas without regard to conflicts of laws principles.

9.10 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.

9.11 SEVERABILITY. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.

9.12 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.

9.13 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.

9.14 NO CONSTRUCTION AGAINST PREPARER. No provision of this Agreement
shall be construed against or interpreted to the disadvantage of any party by
any court or other governmental or judicial authority by reason of such party's
having or being deemed to have prepared or imposed such provision.

9.15 COUNSEL. Each party hereto warrants and represents that each party
has been afforded the opportunity to be represented by counsel of its choice in
connection with the execution of this Agreement, and has had ample opportunity
to read, review, and understand the provisions of this Agreement.

9.16 ATTORNEY'S FEES. In the event of any litigation between Employer
and the Executive arising under or in connection with this Agreement, the
prevailing party shall be entitled to recover from the other party the expenses
of litigation (including reasonable attorney's fees, expenses and disbursements)
incurred by the prevailing party.

EMPLOYMENT AGREEMENT PAGE 12
<PAGE> 13

waiver of any other right arising from a subsequent breach of the same
obligation or for any other default, past, present or future.

9.18 TIME OF ESSENCE; DATES. Time is of the essence of this Agreement.
Anywhere a day certain is stated for payment or for performance of any
obligation, the day certain so stated enters into and becomes a part of the
consideration for this Agreement. If any date set forth in this Agreement shall
fall on, or any time period set forth in this Agreement shall expire on, a day
which is a Saturday, Sunday, federal or state holiday, or other non-business
day, such date shall automatically be extended to, and the expiration of such
time period shall automatically be extended to, the next day which is not a
Saturday, Sunday, federal or state holiday or other non-business day. The final
day of any time period under this Agreement or any deadline under this Agreement
shall be the specified day or date, and shall include the period of time through
and including such specified day or date.

9.19 FACSIMILE AS WRITING. The party expressly acknowledge and agree
that, notwithstanding any statutory or decisional law to the contrary, the
printed product of a facsimile transmittal shall be deemed to be "written" and a
"writing" for all purposes of this Agreement.

9.20 ARBITRATION. The parties agree that any controversy or claim
arising out of or relating to this Agreement, the Executive's employment or
termination, including all statutory and common law claims (except for workers'
compensation and unemployment claims) will be settled exclusively by final and
binding arbitration. Arbitration will be governed by the Federal Arbitration Act
and administered by the Judicial Arbitration and Mediation Services Rules for
the Resolution of Employment Disputes (JAMS). The arbitrator is empowered to
award all appropriate remedies under Texas or federal law. The arbitrator shall
have exclusive authority to resolve any dispute relating to the validity,
interpretation, application and enforcement of this Agreement. Judgment on the
arbitrator's award may be enforced in any court with proper jurisdiction. Each
party will equally bear all costs and legal fees of arbitration, unless
otherwise required by law. The parties further agree that the arbitration will
occur in Waco, McLennan County, Texas.

9.21 TERMINATION OF PRIOR AGREEMENTS. EMPLOYER AND EXECUTIVE ACKNOWLEDGE
AND AGREE THAT THIS AGREEMENT IS THE ONLY AGREEMENT RELATING TO THE TERMS OF
EMPLOYMENT, COMPENSATION, BONUSES, RIGHTS TO ANY PROFITS (OR INTEREST THEREIN)
OR ANY OTHER CLAIM TO PAYMENTS OF ANY KIND OF THE EXECUTIVE RELATING TO THE
EMPLOYER, FIRSTCITY FINANCIAL CORPORATION OR ANY OF THEIR AFFILIATES OR
SUBSIDIARIES COVERING THE EMPLOYMENT PERIOD OR ANY PERIOD OF TIME PRIOR TO THE
EFFECTIVE DATE. ANY AND ALL OTHER AGREEMENTS BETWEEN THE PARTIES TO THIS
AGREEMENT RELATING TO THE TERMS OF EMPLOYMENT, COMPENSATION, BONUSES, RIGHTS TO
ANY PROFITS (OR INTEREST THEREIN) OR ANY OTHER CLAIM TO PAYMENTS OF ANY KIND
(WHETHER DEFERRED OR OTHERWISE), OR OTHER EMPLOYMENT MATTERS BETWEEN THE
EXECUTIVE AND EMPLOYER, FIRSTCITY FINANCIAL CORPORATION, OR ANY OF THEIR
AFFILIATES OR SUBSIDIARIES ARE HEREBY TERMINATED.

[END OF PAGE - SIGNATURE PAGE TO FOLLOW]

EMPLOYMENT AGREEMENT PAGE 13

<PAGE> 14

IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date above first written above.

EMPLOYER:

FIRSTCITY COMMERCIAL CORPORATION

By: /s/ James T. Sartain
---------------------------------

Name: James T. Sartain
--------------------------------
Title: Chairman
-------------------------------

EXECUTIVE:

/s/ Terry R. DeWitt
-------------------------------------
Terry R. DeWitt

<PAGE> 1
EXHIBIT 10.38

EMPLOYMENT AGREEMENT

This Employment Agreement (this "Agreement") is made as of OCTOBER 1,
1999, by and between FIRSTCITY COMMERCIAL CORPORATION, a Texas corporation (the
"Employer"), and G. Stephen Fillip, an individual (the "Executive"). The
parties, intending to be legally bound, agree as follows:

1. DEFINITIONS

For the purposes of this Agreement, the following terms have the
meanings specified or referred to in this Section 1.

"AGREEMENT" means this Employment Agreement, as amended from time to
time.

"BASIC COMPENSATION" means Salary and Benefits.

"BENEFITS" has the meaning as defined in Section 3.1(b).

"BOARD OF DIRECTORS" means the board of directors of the Employer.

"BONUS POOL" means:

(a) for the Computation Year ending December 31, 1999, $600,000;

EMPLOYMENT AGREEMENT PAGE 1
<PAGE> 2

the Return on Equity for the Computation Year ending December 31, 2002
is 20% or more, 10% of Net Earnings for the Computation Year ending
December 31, 2002;

"CAPITAL NOTE" means the promissory note of Employer payable to
FirstCity Financial Corporation, as it may be amended, modified, substituted or
renewed.

"COMPUTATION YEAR" means the Fiscal Year of the Employer for which an
Incentive Bonus is being determined.

"DISABILITY" has the meaning as defined in Section 6.2.

"EFFECTIVE DATE" means October 1, 1999.

"EMPLOYMENT PERIOD" means the term of the Executive's employment under
this Agreement.

EMPLOYMENT AGREEMENT PAGE 2
<PAGE> 3

"EMPLOYER" means FirstCity Commercial Corporation.

"FISCAL YEAR" means the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.

"FOR CAUSE" has the meaning as defined in Section 6.3.

"FOR GOOD REASON" has the meaning as defined in Section 6.4.

"INCENTIVE BONUS" has the meaning as defined in Section 3.2.

"POST-EMPLOYMENT PERIOD" has the meaning as defined in Section 8.2.

"PROPRIETARY ITEMS" has the meaning as defined in Section 7.2(a)(iv).

"RETURN ON EQUITY" means, for the Computation Year in question, the
percentage return determined by dividing (i) Net Earnings by (ii) Equity.

"SALARY" has the meaning as defined in Section 3.1(a).

2. EMPLOYMENT TERMS AND DUTIES

2.1 EMPLOYMENT. The Employer hereby employs the Executive, and the
Executive hereby accepts employment by the Employer, upon the terms and
conditions set forth in this Agreement.

2.2 TERM. Subject to the provisions of Section 6, the term of the
Executive's employment under this Agreement will begin on the Effective Date and
end on December 31, 2004.

EMPLOYMENT AGREEMENT PAGE 3
<PAGE> 4

cooperate fully with the Board of Directors in the advancement of the best
interests of the Employer. Nothing in this Section 2.3, however, will prevent
the Executive from engaging in additional activities in connection with personal
investments and community affairs that are not inconsistent with the Executive's
duties under this Agreement.

3. COMPENSATION

3.1 BASIC COMPENSATION.

4. FACILITIES AND EXPENSES

5. VACATIONS AND HOLIDAYS

EMPLOYMENT AGREEMENT PAGE 4
<PAGE> 5

paid holidays and other paid leave as set forth in and subject to the Employer's
policies, as amended from time to time.

6. TERMINATION

(a) upon the death of the Executive;

(c) For Cause (as defined in Section 6.3), immediately upon notice from
the Employer to the Executive, or at such later time as such notice may
specify;or

EMPLOYMENT AGREEMENT PAGE 5
<PAGE> 6

adhere to any written Employer policy if the Executive has been given a
reasonable opportunity to comply with such policy or cure his failure to comply
(which reasonable opportunity must be granted during the ten-day period
preceding termination of this Agreement); (c) the Executive's appropriation (or
attempted appropriation) of a material business opportunity of the Employer,
including attempting to secure or securing any personal profit in connection
with any transaction entered into on behalf of the Employer; (d) the Executive's
misappropriation (or attempted misappropriation) of any of the Employer's funds
or property or commission of any act of fraud or embezzlement by the Executive;
(e) willful misconduct or serious or repeated neglect by the Executive in the
performance of his duties hereunder; (f) any breach by the Executive of any
fiduciary duty to the Employer or any serious or repeated breach by the
Executive of any other obligation to the Employer implied by law; (g) the
Executive's conviction of, the indictment for (or its procedural equivalent), or
the entering of a guilty plea or plea of no contest with respect to, a felony,
the equivalent thereof, or any other crime with respect to which imprisonment is
a possible punishment; and (h) the Executive's failure to own and control at
least 7% of the issued and outstanding common shares of FirstCity Holdings
Corporation.

(a) SALARY. Upon the termination of this Agreement, the Executive will
be entitled to receive his Salary only through the date such termination
is effective.

(b) BENEFITS. The Executive's accrual of, or participation in plans
providing for, the Benefits will cease at the effective date of the
termination of this Agreement, and the

EMPLOYMENT AGREEMENT PAGE 6
<PAGE> 7

Executive will be entitled to accrued Benefits pursuant to such plans
only as provided in such plans or by operation of law.

7. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS

7.2 AGREEMENTS OF THE EXECUTIVE. In consideration of the compensation
and benefits to be paid or provided to the Executive by the Employer under this
Agreement, the Executive covenants as follows:

(a) CONFIDENTIALITY.

EMPLOYMENT AGREEMENT PAGE 7

<PAGE> 8

(i) disclose to the Employer in writing any Employee Invention;

(iv) sign all other papers necessary to carry out the above
obligations; and

(v) give testimony and render any other assistance but without
expense to the Executive in support of the Employer's rights to
any Employee Invention.

8. NON-COMPETITION AND NON-INTERFERENCE

EMPLOYMENT AGREEMENT PAGE 8
<PAGE> 9

8.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges that:
(a) the services to be performed by him under this Agreement are of a special,
unique, unusual, extraordinary, and intellectual character; (b) the Employer's
business is international in scope; (c) the Employer competes with other
businesses that are or could be located in any part of the world; (d) Employer
has required that the Executive make the covenants set forth in this Section 8
as a condition to entering into this Agreement; and (e) the provisions of this
Section 8 are reasonable and necessary to protect the Employer's business.

(d) at any time during or after the Employment Period, disparage the
Employer or any of its shareholders, directors, officers, employees, or
agents.

For purposes of this Section 8.2, the term "Post-Employment Period"
means the one (1) year period beginning on the date of termination of the
Executive's employment with the Employer.

EMPLOYMENT AGREEMENT PAGE 9
<PAGE> 10

For purposes of this Section 8 only, the term "Employer" means the
Employer and/or any of the Employer's subsidiaries or affiliates.

9. GENERAL PROVISIONS

EMPLOYMENT AGREEMENT PAGE 10
<PAGE> 11

9.3 REPRESENTATIONS AND WARRANTIES BY THE EXECUTIVE. The Executive
represents and warrants to the Employer that the execution and delivery by the
Executive of this Agreement do not, and the performance by the Executive of the
Executive's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: (a) violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Executive; or (b) conflict with, result in the breach of any provisions of or
the termination of, or constitute a default under, any agreement to which the
Executive is a party or by which the Executive is or may be bound.

If to Employer: FirstCity Commercial Corporation
P.O. Box 8216
Waco, Texas 76714-8216
Attention: James T. Sartain
Facsimile: 254-751-1208

EMPLOYMENT AGREEMENT PAGE 11
<PAGE> 12

If to the Executive: G. Stephen Fillip

------------------------------

9.9 GOVERNING LAW. This Agreement will be governed by the laws of the
State of Texas without regard to conflicts of laws principles.

9.13 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.

EMPLOYMENT AGREEMENT PAGE 12
<PAGE> 13

9.17 NON-WAIVER. Failure by any party to complain of any action,
non-action or breach of any other party shall not constitute a waiver of any
aggrieved party's rights hereunder. Waiver by any party of any right arising
from any breach of any other party shall not constitute a waiver of any other
right arising from a subsequent breach of the same obligation or for any other
default, past, present or future.

EMPLOYMENT AGREEMENT PAGE 13
<PAGE> 14

CORPORATION, OR ANY OF THEIR AFFILIATES OR SUBSIDIARIES ARE HEREBY
TERMINATED.

[END OF PAGE - SIGNATURE PAGE TO FOLLOW]

EMPLOYMENT AGREEMENT PAGE 14

<PAGE> 15

IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date above first written above.

EMPLOYER:

FIRSTCITY COMMERCIAL CORPORATION

By: /s/ James T. Sartain
-----------------------------
Name: James T. Sartain
--------------------------
Title: Chairman
--------------------------

EXECUTIVE:

/S/ G. Stephen Fillip
------------------------------------
G. Stephen Fillip

EMPLOYMENT AGREEMENT PAGE 15

<PAGE> 1
EXHIBIT 10.39

SHAREHOLDER AGREEMENT

This Shareholder Agreement ("Agreement") is made and entered into as of
October 1, 1999, by and among FIRSTCITY HOLDINGS CORPORATION, a Texas
corporation (the "Corporation"), and FIRSTCITY COMMERCIAL CORPORATION, a Texas
corporation ("FirstCity Commercial"), TERRY R. DEWITT, G. STEPHEN FILLIP, AND
JAMES C. HOLMES (each of the foregoing shareholders being referred to
individually as a "Shareholder" and collectively as the "Shareholders") with
respect to all of the now or hereafter issued and outstanding shares of common
or preferred stock or other issued and outstanding securities of the Corporation
(including options, warrants and convertible instruments), presently or
hereafter owned by each of the Shareholders (the "Stock"). Any reference to
Stock owned by a Shareholder shall mean all of the Stock registered in that
Shareholder's name and including, but not limited to, any community property
interest of the Shareholder's spouse in such Stock.

RECITALS

WHEREAS, the Shareholders are presently the holders of record of all of
the issued and outstanding shares of the Stock of the Corporation; and

WHEREAS, the Shareholders believe that it would be in the best interest
of the Shareholders and the Corporation to place certain restrictions upon the
right of any Owner of Stock to transfer any Stock owned by such Owner; and

WHEREAS, the directors of the Corporation, having considered the
provisions of this Agreement, have resolved that in their opinions the
restrictions upon the transfer of the Stock of the Corporation and the
provisions for the purchase of the Stock, all as hereinafter set forth, are in
the best interest of the Corporation.

NOW, THEREFORE, the parties hereto hereby agree as follows:

ARTICLE I
DEFINITIONS

SECTION 1.01. DEFINITIONS OF CERTAIN AGREEMENT TERMS. For purposes of
this Agreement, the terms hereinafter set forth shall have the following
definitions unless otherwise specifically stated.

"BUSINESS DAYS" shall mean days that are not Saturdays, Sundays, or
legal holidays in the United States or the State of Texas.

FIRSTCITY HOLDINGS CORPORATION
SHAREHOLDER AGREEMENT PAGE 1
<PAGE> 2

"MINORITY SHAREHOLDER" shall mean any Shareholder other than FirstCity
Commercial.

"OWNED" shall mean Stock referred to as being "owned" by any persons
shall include all Stock owned (whether acquired before or after this date) as
the separate property of such person, all Stock owned as the community property
of such person and his or her spouse that is registered in the name of such
person, all Stock acquired by gift, partition or other transfer of community
property Stock, and any shares into which any such Stock, or any portion
thereof, may be converted. A person who owns Stock is sometimes referred to as
an "Owner." While a spouse of a Shareholder may own an interest in Stock that is
deemed to be "owned" by such Shareholder under this definition, the term
"Shareholder" as used in this Agreement does not apply to the spouse of any such
named party to this Agreement unless such spouse also owns Stock.

"SHAREHOLDER" shall include all of the persons who own Stock in the
Corporation who are parties to this Agreement, and any persons who subsequently
shall become parties to this Agreement.

"STOCK" shall have the meaning set forth in the introductory paragraph
of this Agreement.

"TRANSFER" shall mean the sale, exchange, assignment, pledge, gift,
hypothecation, transfer or other disposition (whether voluntary or involuntary)
by a Minority Shareholder of his or her Stock, either directly or indirectly, to
any third party or any offer or attempt to accomplish any of the foregoing.

ARTICLE II
RESTRICTIONS AGAINST TRANSFER BY MINORITY SHAREHOLDERS

SECTION 2.01. TRANSFER OF STOCK RESTRICTED BY MINORITY SHAREHOLDERS.
Each of the Minority Shareholders agrees that he or she will not in any way
Transfer any of his or her Stock, or any right or interest therein, without the
prior written consent of the Corporation and the other Shareholders, except for
a Transfer that meets the requirements of this Agreement. Any purported Transfer
in violation of any provisions of this Agreement will be void and will not
operate to transfer any right, title, or interest in the Stock to the purported
Transferee.

ARTICLE III
PUT AND CALL OPTIONS

SECTION 3.01. TERMINATION OF EMPLOYMENT OF MINORITY SHAREHOLDER. Upon
the termination of employment of any Minority Shareholder by the Corporation or
any affiliate of the Corporation, such Minority Shareholder shall have the right
to sell (the Termination Put") "100% of the Stock Owned by the Minority
Shareholder to FirstCity Commercial for an amount equal to the Termination
Purchase Price (as herein defined). Upon the termination of employment of any

FIRSTCITY HOLDINGS CORPORATION
SHAREHOLDER AGREEMENT PAGE 2
<PAGE> 3

Minority Shareholder by the Corporation or any affiliate of the Corporation,
FirstCity Commercial shall have the right to purchase (the "Termination Call")
100% of the Stock Owned by the Minority Shareholder for an amount equal to the
Termination Purchase Price.

"Termination Purchase Price" means an amount equal to: (a) if the date
of termination of employment of the Minority Shareholder (the "Employment
Termination Date") is on or before December 31, 2000, the lesser of (i) the book
value of the Stock Owned by the Minority Shareholder or (ii) the amount of the
capital actually contributed by the Minority Shareholder to the Corporation; (b)
if the Employment Termination Date is after December 31, 2000 but on or before
December 31, 2004, the book value of the Stock Owned by the Minority
Shareholder; and (iii) if the Employment Termination Date is after December 31,
2004, the Fair Market Value of the Stock Owned by the Minority Shareholder.

"Fair Market Value of the Stock Owned by Minority Shareholder" means:
(i) the fair market value of the Stock Owned by the Minority Shareholder
mutually agreed upon by FirstCity Commercial and the Minority Shareholder; or
(ii) in the event FirstCity Commercial and the Minority Shareholder cannot agree
within thirty (30) days after the Employment Termination Date on the fair market
value of the Stock Owned by the Minority Shareholder, the fair market value of
the Stock Owned by the Minority Shareholder determined by the following
appraisal process:

The Minority Shareholder shall appoint an appraiser and FirstCity
Commercial shall appoint an appraiser. Any person/entity appointed as an
appraiser must meet the following qualifications: (a) be a certified
public accountant employed by a nationally recognized public accounting
firm, or an employee of a nationally recognized investment banking firm;
and (b) not be related to an officer or director of the FirstCity
Financial Corporation or any of its affiliates, or to the Minority
Shareholder within the third degree of consanguinity. If either
FirstCity Commercial or the Minority Shareholder fails to name an
appraiser with the specified time, the other party may select the second
appraiser.

The joint determination of the fair market value by the two
appraisers shall be final and binding on all parties. If the two
appraisers selected are unable to agree on the fair market value, the
two appraisers shall select a third appraiser, whose determination as to
the fair market value shall be averaged with the appraisals of the other
two appraisers. The average of the three appraisals shall be conclusive
evidence as to the fair market value and shall be final and binding on
all parties. The appraisers shall deliver a written report of their
appraisal to all parties to this Agreement.

For purposes of Section 3.01 the book value and fair market value of the
Stock Owned by a Minority Shareholder shall be determined as of the end of the
previous fiscal quarter.

FIRSTCITY HOLDINGS CORPORATION
SHAREHOLDER AGREEMENT PAGE 3
<PAGE> 4

The Termination Put and Termination Call shall be in writing and shall
be exercised within 60 days after the Employment Termination Date. The
Termination Purchase Price shall be payable 20% in cash and 80% in an unsecured
promissory note payable by FirstCity Commercial, with an annual interest rate
equal to the prime rate and payable in four (4) equal annual installments. The
closing of the Termination Put or Termination Call shall be within 90 days after
the Employment Termination Date.

SECTION 3.02. PUT OPTION OF MINORITY SHAREHOLDERS. At any time after
December 31, 2004, any Minority Shareholder shall have the right to sell (the
"Put") 100% of the Stock Owned by the Minority Shareholder to FirstCity
Commercial for an amount equal to the Fair Market Value of the Stock Owned by
the Minority Shareholder as defined in Section 3.01 (the "Put Price"). The Put
shall be in writing and the date the Put is made shall be referred to as the
"Put Date." The Put Price shall be payable 20% in cash and 80% in an unsecured
promissory note payable by FirstCity Commercial, with an annual interest rate
equal to the prime rate and payable in four (4) equal annual installments. The
closing of the Put shall be within 90 days after the Put Date.

ARTICLE IV [RESERVED]

ARTICLE V
NOTICES

SECTION 5.01. NOTICE PROCEDURE. All notices required to be given
hereunder will be deemed to be duly given on the date of delivery if delivered
in person or three (3) Business Days after the date of mailing if mailed by
registered or certified mail, postage prepaid, return receipt requested, to the
Secretary of the Corporation at the Corporation's principal office and to the
Shareholders at the addresses indicated on the signature page of this Agreement.
The address of any Shareholder may be changed only by giving written notice of
such change of address to all of the other parties hereto in the manner provided
herein for giving notices.

ARTICLE VI
STOCK LEGEND

SECTION 6.01. LEGEND REQUIRED BY THIS AGREEMENT. The Corporation and
each Shareholder hereby agrees that all certificates representing shares of
Stock of the Corporation that at any time are subject to the provisions of this
Agreement will have endorsed upon them, in addition to any legend required by
the Corporation's Bylaws, in boldface type a legend in substantially the
following form:

THE SHARES OF STOCK REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO A SHAREHOLDERS' AGREEMENT

FIRSTCITY HOLDINGS CORPORATION
SHAREHOLDER AGREEMENT PAGE 4
<PAGE> 5

("AGREEMENT"), DATED OCTOBER 1, 1999, AMONG THE, A COPY OF WHICH IS ON
FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION, AND SAID SHARES MAY NOT
BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED, OR OTHERWISE
DISPOSED OF EXCEPT IN STRICT ACCORDANCE WITH THE TERMS OF THE AGREEMENT.
A COPY OF THE AGREEMENT WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER
OF THIS CERTIFICATE UPON RECEIPT BY THE CORPORATION AT ITS PRINCIPAL
PLACE OF BUSINESS OR REGISTERED OFFICE OF A WRITTEN REQUEST FROM THE
HOLDER REQUESTING SUCH A COPY.

SECTION 6.02. EXECUTION OF AGREEMENT BY TRANSFEREE. Under no
circumstances will any sale or other Transfer of any shares of Stock subject to
this Agreement be valid until the proposed transferee has executed and become a
party to an Agreement substantially similar to this Agreement and thereby
becomes subject to all of its provisions, unless this requirement is waived by
written consent of the parties; notwithstanding any other provisions of this
Agreement, no such sale or other Transfer of any kind will in any event result
in the nonapplicability of the provisions of this Agreement at any time to any
of the shares of Stock subject to this Agreement.

ARTICLE VII
TERM

SECTION 7.01. TERMINATION OF AGREEMENT. This Agreement will terminate
upon the earlier of: (a) the agreement of all parties hereto to terminate this
Agreement, (b) the purchase by the Corporation of all the shares of Stock of all
but one Shareholder, (c) the purchase by any one Shareholder of all of the
issued and outstanding shares of Stock of the Corporation, or (d) upon the
dissolution of the Corporation, or upon the filing of a voluntary or involuntary
petition by or against the Corporation under Chapter 7 or Chapter 11 of the
Bankruptcy Code upon the appointment of a receiver for the Corporation.

SECTION 7.02. TERMINATION AS TO SPECIFIC SHAREHOLDER. This Agreement
shall terminate as to any specific Shareholder upon the date such Shareholder
ceases to own any Stock. Such Shareholder also shall cease to be a party to this
Agreement as of the date that he ceases to own, directly or beneficially, any
Stock.

FIRSTCITY HOLDINGS CORPORATION
SHAREHOLDER AGREEMENT PAGE 5
<PAGE> 6
ARTICLE VIII
MISCELLANEOUS

SECTION 8.01. FURTHER ASSURANCES. Each party to this Agreement agrees to
perform all further acts and to execute and deliver all further documents which
may be reasonably necessary to carry out the provisions of this Agreement.

SECTION 8.02. SEVERABILITY. In the event that any of the provisions, or
portions thereof, of this Agreement are held to be unenforceable or invalid by
any court of competent jurisdiction, the validity and enforceability of the
remaining provisions, or portions thereof, will not be affected, and in lieu of
such unenforceable provision there shall be added automatically as part of this
Agreement a provision as similar in terms as may be valid and enforceable.

SECTION 8.03. CONSTRUCTION. Whenever used in this Agreement, the
singular number will include the plural, and the plural number will include the
singular; pronouns in the masculine, feminine, or neuter gender will include
each other gender.

SECTION 8.04. GOVERNING LAW. THIS AGREEMENT HAS BEEN EXECUTED IN AND
WILL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS.

SECTION 8.05. SUCCESSORS. Subject to the restrictions against Transfer
or assignment as contained in this Agreement, the provisions of this Agreement
will benefit and will be binding on the assigns, successors in interest,
personal representatives, estates, heirs and legatees of each of the parties
hereto. Each of the Minority Shareholders agrees that he or she will not create
or permit to exist any lien, claim or encumbrance at any time on any of his or
her shares of stock subject to this Agreement.

SECTION 8.06. AMENDMENT. This Agreement may only be amended by the
written consent of all of the parties to this Agreement at the time of such
amendment.

SECTION 8.07. HEADINGS. The section headings contained in this
Agreement are for convenience only and shall in no manner by construed as part
of this Agreement.

SECTION 8.08. ENTIRE AGREEMENT; COUNTERPARTS. This Agreement contains
the entire understanding between the parties concerning the subject matter
contained in this Agreement. There are no representations, agreements,
arrangements or understandings, oral or written, between or among the parties
hereto, relating to the subject matter of this Agreement, which are not fully
expressed herein. This Agreement may be signed in one or more counterparts, all
of which shall be considered one and the same agreement.

FIRSTCITY HOLDINGS CORPORATION
SHAREHOLDER AGREEMENT PAGE 6
<PAGE> 7

SECTION 8.09. WAIVER. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any party.

SECTION 8.10. SPECIFIC PERFORMANCE. The right to own and vote Stock and
to restrict the transfer of the Stock is hereby declared by the parties hereto
to be a unique right, the loss of which is not readily susceptible to monetary
quantification. Consequently, the parties hereto agree that an action for
specific performance of the purchase and sale obligations created by this
Agreement or an action brought to enjoin the unauthorized transfer of Stock are
remedies for the breach of the provisions of this Agreement. If the parties to
this Agreement are forced to institute legal proceedings to enforce their rights
in accordance with the provisions of this Agreement, they shall be entitled to
recover their reasonable attorneys' fees and court costs incurred in enforcing
such rights.

[END OF PAGE - SIGNATURE PAGE(S) TO FOLLOW]

FIRSTCITY HOLDINGS CORPORATION
SHAREHOLDER AGREEMENT PAGE 7

<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
to be effective as of the date first written above.

FIRSTCITY HOLDINGS CORPORATION

By: /s/ Terry R. DeWitt
---------------------------------
Terry R. DeWitt, Co-President

Address: P.O. Box 8216
Waco, Texas 76714-8216

/s/ Terry R. DeWitt
------------------------------------
TERRY R. DEWITT

Owner of 70 Shares
Address:
--------------------------

--------------------------

/s/ G. Stephen Fillip
------------------------------------
G. STEPHEN FILLIP

Owner of 70 Shares
Address:
--------------------------

--------------------------

/s/ James C. Holmes
------------------------------------
JAMES C. HOLMES

Owner of 60 Shares
Address:
--------------------------

--------------------------

FIRSTCITY HOLDINGS CORPORATION
SHAREHOLDER AGREEMENT SIGNATURE PAGE
<PAGE> 9

FIRSTCITY COMMERCIAL CORPORATION

By:
---------------------------------
James T. Sartain,
Chairman of the Board

Owner of 800 Shares
Address: P.O. Box 8216
Waco, Texas 76714-8216

FIRSTCITY HOLDINGS CORPORATION
SHAREHOLDER AGREEMENT SIGNATURE PAGE

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
FirstCity Financial Corporation:

We consent to incorporation by reference in the registration statements
(Number 333-10345, 333-48671, 333-59333, 333-00623 and 333-09485) on Forms S-3
and S-8 of FirstCity Financial Corporation, of our report dated March 31, 2000,
relating to the consolidated balance sheets of FirstCity Financial Corporation
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1999, which report appears in
the December 31, 1999, annual report on Form 10-K of FirstCity Financial
Corporation.

KPMG LLP

Forth Worth, Texas
April 6, 2000

<PAGE> 1

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

The Partners
WAMCO Partnerships:

We consent to incorporation by reference in the registration statements
(Number 333-10345, 333-48671, 333-59333, 333-00623 and 333-09485) on Forms S-3
and S-8 of FirstCity Financial Corporation, of our report dated March 31, 2000,
relating to the combined balance sheets of WAMCO Partnerships as of December 31,
1999 and 1998, and the related combined statements of operations, changes in
partners' capital, and cash flows for each of the years in the three-year period
ended December 31, 1999, which report appears in the December 31, 1999, annual
report on Form 10-K of FirstCity Financial Corporation.

KPMG LLP

Forth Worth, Texas
April 6, 2000

<ARTICLE> 5

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<PERIOD-END> DEC-31-1999
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26,965
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